Inheritance Tax (IHT), a daunting pair of words for most people and often accompanied by worries of it being complicated or a way for people to sneak tax-free under the radar… Well, today is the first part of how we can prove this is not the case and that this is how the government intends you to make the most of your tax-free allowance!
Although inheritance tax is the most reviled tax, the dreaded 40% that everyone has heard so much about may not actually come into effect at all on your assets, depending on how you plan for Inheritance Tax. You could even manage to completely avoid paying a penny of it, as intended; no sneaky schemes or shady money management, HMRC has thought about this!
The “Nil-Rate Band” (NRB) for IHT very much does what it says on the tin! This is a financial band (amount) that has a Nil Tax Rate; everyone, even you, has this! So, when you leave your assets, which could be anything from your savings accounts, jewellery, cars, and properties*, the government allows you a tax-free allowance of £325,000 as of 2022 so far.
So, if you only have assets of £300,000 in total, everything below that £325,000 threshold can pass as you please, free of any IHT! Though anything over that threshold will likely be taxed at the dreaded 40%.
Personal Tax Allowance
However, this is if you are a sole person. IHT has a strange preference to married couples/civil partners, these groups do get a special treatment when it comes to how NRBs interact. As we have just learned, each person gets £325,000 as their personal allowance; it is worth noting that if you are an unmarried couple, your personal allowance is used up by passing your assets to your partner.
Married / Civil Partnership
If you’re married/civil partnered, when the first member of the couple passes away, their NRB (the £325k) doesn’t get used up or disappear… the amount of tax-free allowance that is left considered unused and could be transferred to the surviving spouse!
Let’s say for example, the husband dies, and he passes everything to his wife (my apologies for the nuclear family example) – firstly, there is the “spousal exemption” so all assets and monies passing to your spouse/partner are automatically free of tax! So, this means that the Husband’s NRB (£325k) of tax-free allowance was never used…
Instead, the surviving wife (or any spouse) combines their NRB with their deceased partner’s giving them a total of £650,000 of tax-free allowance to give to friends and family in their Will.
Looking for more information on Inheritance Tax?
Head over to the Society of Will Writers to read the full article – How to Leave up to £1 Million to Your Loved Ones Tax Free, a Two-part Guide – The Society of Will Writers