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How to Avoid Inheritance Tax on a Property

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How to Avoid Inheritance Tax on a Property
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Some estates are subject to inheritance tax (IHT) when they are passed on.

This means the total value of a person’s assets, including property, is larger than the tax-free threshold when they pass away.

Because property values have increased significantly in many regions in the past thirty years, more estates than ever are being caught by the tax. But there are ways to reduce its impact.

If you need to sell an inherited home quickly, we’re experienced at dealing sensitively with emotionally charged situations like this.

When is inheritance tax due?

Everybody can pass on £325,000 tax-free plus a further £175,000 if your assets include a home you leave to children or grandchildren.

When a spouse dies, their tax-free threshold is added to that of their surviving spouse or civil partner. This means passing on £1 million without paying inheritance tax is possible.

Any assets above these thresholds are taxed at 40%.

For estates worth more than £2 million, the additional tax-free threshold for homes, known as the residential nil rate band (RNRB), is reduced by £1 for every £2, which is over £2 million.

So, an estate worth £ 2.7 million or more would lose the full £350,000 RNRB a widowed spouse or civil partner is entitled to.

These thresholds are subject to change depending on the government’s policies of the time.

Reducing what is owed

There are ways to limit the amount of inheritance tax you pay legally.

The first and simplest is to leave everything to a surviving spouse or civil partner, since this will not be taxed.

It is essential to make a will stating this. If there is no will, known as intestacy, some of the estate will be passed on to children and may be subject to inheritance tax.

Wills can also be changed after someone has passed away, as all beneficiaries agree.

For example, children may decide it is more tax-efficient for all assets to pass to their surviving parent.

If you do not have a spouse or civil partner, there are other ways to reduce IHT:

Gifts

Money or assets gifted seven years before someone dies are not subject to the tax.

Those given within three years will be taxed 40% if they are part of an estate worth more than the inheritance tax threshold. This reduces by 8% each year after that.

You can also give gifts of up to £3,000 tax-free per year, and contributions to weddings or civil ceremonies of children are exempt from up to £5,000.

Trusts

As long as you, your spouse or children under 18 do not benefit from them, trusts are not counted as part of your estate when you die.

When you set up a trust, it means you give cash or another asset to someone to use for the benefit of a third person.

You could set one up for your adult child to help them pay for the cost of caring for someone. However, it’s essential to be aware that some trusts attract income and capital gains tax.

Charity

Everything you leave to charity is tax-free. Leaving 10% of your estate to charity will reduce your IHT rate from 40% to 36%.

Insurance

Taking out life insurance won’t reduce your IHT bill, but it will give those inheriting your assets money to help them cover the costs.

The policy should be placed in trust to ensure it is not added to the estate’s value.

Equity release

This is a way of taking value from a home and passing it on as a gift during your lifetime. Bear in mind that it will avoid IHT if given seven years before your death.

This will add debt to your estate that must be paid, usually when you die, so it’s essential to work out if the tax savings are worth it.

As you plan your inheritance, it’s a good idea to talk to an expert before making any big decisions, such as equity release, to ensure it’s the right option.

Paying the bill

Once the value of an inherited estate has been calculated, the beneficiaries will have to pay any due inheritance tax.

If there’s enough money in a bank account or an inherited investment, the bank can usually directly pay HMRC.

If there isn’t, beneficiaries will have to pay using their funds or arrange a loan – sometimes known as a probate or executor loan – to cover the cost before getting the money back once the estate is inherited.

However, inheritance tax on assets such as a home can be paid in ten annual instalments.

 

Working with us

 

If you inherit a home, it can’t be sold until probate has finished and ownership has been transferred to you.

Once it is legally yours, you may want to sell it quickly to cover a probate loan or recoup other costs.

We can buy your probate home within seven days if necessary, bringing you peace of mind at a difficult time and getting funds into your account quickly.

If you’d like to learn more about our service, please get in touch for a chat.

 

Probate specialists

The process of executing probate can be stressful and highly taxing.

Unforeseen complexities can often drag cases out, causing prolonged and unnecessary upset; sadly, many team members can attest to this personally.

Laurelo is a family-owned Probate Specialist, who have over 50 years’ combined experience in guiding executors and families through the probate process.

They offer a bespoke, face-to-face service and take the complexity out of any situation with clear and concise explanations.

Should you require any professional advice on dealing with probate, Laurelo can help. You can learn more about the services they offer here.

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