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Alongside the huge emotional toll a death of a loved one causes, there is also a raft of administrative tasks that must be undertaken to ensure your loved one’s belongings are dealt with in accordance with their wishes. While our Afterlife Legal Services can help you through all elements of the Executry process, such as Obtaining Confirmation and ingathering and distributing their assets, the first thing that needs to be done is estimating the size of the estate. Critical to that process is understanding the value of the assets that are to be distributed. Depending on the estate’s size, one of the biggest factors to be taken into account is the size of any potential Inheritance Tax bill.

If you’re looking for help navigating Inheritance Tax, when drafting your Will or after a loved one dies, Friends Legal are here to help.

When is Inheritance Tax due?

An estate constitutes the property, money and possessions of your loved one. Potentially, everything is caught, including gifts. If the value of all these assets comes to less than £325,000, then there is usually no Inheritance Tax to pay. If the estate is worth more than that amount, then potentially Inheritance Tax may be due. This is because each individual has a “Nil-Rate Band”, which is the threshold for which you can pass your estate to a non-exempt beneficiary. This has been £325,000 since April 2009.

Where the estate is worth more than the Inheritance Tax threshold, it may still be possible to apply exemptions to determine that no tax may be due.

Even if no Inheritance Tax is due, the estate still needs to be reported to the HMRC. At Friends Legal we can help you with these forms as part of our Afterlife Legal Services.

What are the Inheritance Tax Exemptions?

Spousal Exemption

Spouses and civil partners are exempt from Inheritance Tax. This means that a full estate can be transferred to the surviving spouse or civil partner, and there would be no Inheritance Tax liability, provided that the they are domiciled in Scotland. This would also preserve the first spouse or civil partner’s Nil-Rate Band for the survivor. On the second death, both Nil-Rate Bands could be applied to the second estate.

For example, A dies leaving their full estate of £450,000 to their spouse, B. B then dies with a total estate of £600,000. B would have their own Nil-Rate Band of £325,000 and could use the unused Nil-Rate Band from A’s estate to make B’s full estate exempt from Inheritance Tax.   

Home

If your loved one has passed their home to their spouse or civil partner, then it is exempt from Inheritance Tax.

There is also a relatively new Inheritance Tax allowance called the Residential Nil-Rate Band. This is available when a residential property is left to direct descendants, and certain conditions are met.

Only one “main” property can have the allowance applied, and it must have been used as a residence. The property must be passed to direct decedents, which include children, adopted children, and stepchildren.

The Residential Nil-Rate Band allowance is in addition to an individual’s Nil-Rate Band. The additional Residential Nil Rate Band allowances are:

  • £100,000 in 2017/18
  • £125,000 in 2018/19
  • £150,000 in 2019/20
  • £175,000 in 2020/21

The level of the exemption available tapers off for estates which are over £2 million.

These allowances are the maximum that can be claimed – if the value of the property is less than the allowance, then the allowance is reduced to the value of the property.

Similar to the Nil-Rate Band, a Residential Nil-Rate Band can also be transferred to the surviving spouse or civil partner on the second death if it was unused.

Gifts

Generally, a seven-year rule applies to gifts that your loved one has parted with within the seven years before their death. These gifts can be considered part of the estate for Inheritance Tax purposes until seven years has passed, with the rate of inheritance tax applicable to the gift being determined by how long ago the gift was made.

The following are examples of additional exemptions available in respect of gifts:

  • gifts between spouses or civil partners.
  • small gifts, such as birthday presents, up to £250 for any one individual each year.  
  • gifts made in contemplation of a marriage or civil partnership, with the amount exempt depending on the relationship of the parties.
  • normal expenditure made out of income.
  • gifts to registered charities and political parties
  • an annual allowance of £3,000 for lifetime gifts.

If you would like to make a gift to charity, friends or family we can make that happen with our fixed-fee will writing service.

Trusts

Setting up a Trust during your lifetime can potentially reduce the Inheritance Tax which may be payable at the time you pass away. If you would like to discuss if a trust would benefit your family, you can contact our By Your Side team for more information on 0333 3580 583.

What are the Inheritance Tax Rates?

In the UK, the inheritance tax rate is 40% on the difference between the threshold and the full value of the estate.

The rate will also reduce to 36% if your loved one has left 10% of the estate’s net value to charity in their will. 

Contact Friends Legal

For more information about our Afterlife or Wills services, please contact our team on 0333 3580 583, who will take the initial details and recommend the best product for you and your loved ones. We provide a wide variety of ways to contact the team and our opening hours span more than the usual 9-5 – so you can get in touch at a time and in a way that suits you. 

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