Inheritance Tax

December 2, 2021

Did you really think you could keep all of that money that’s in your property?

There’s a way to make it (nearly) work you know….

Listen to this scenario and let us know if it sounds familiar.

You bought a shiny new house several years ago and now it’s increased in value. Great! you think, I’ve now got extra money – Happy days!.

Well, we hate to kill the joy for a minute – lets talk about Inheritance Tax ☹

Now, Inheritance Tax is a tax on the estate of someone who has passed away. Not everyone pays it, and the current threshold for an individual is £325,000. So, if your estate’s worth less than this, you wouldn’t pay any IHT. Easy right?

Actually, when we say estate, we’re including your house, your car, any savings and in fact, any other items you own.

Basically, if you sold everything you owned, would it come to more than £325,000 minus any liabilities? (don’t forget those watches that you’ve accumulated, the designer bags and clothes, that limited edition signed print of that famous person!)  If the total is above £325k then you’ll be paying tax at 40% on anything over that amount.  Scary stuff…

Did you know though, there are some ways that you can increase the amount of inheritance tax?  Well,  if you choose to leave your home to your children, stepchildren, or grandchildren, the limit increases to £475,000. This is called the ‘Residence Nil Rate Band’ and it was introduced in April 2017.   Did you also know that for married couples or civil partnerships, any amount that’s unused in the threshold can be transferred and added to the partner’s threshold? So in total it’s possible to create a maximum limit of £950,000 for the estate that would be free from IHT.  Interesting hey?

On a previous blog we promised to let you know how releasing equity from your home can help you with your Inheritance Tax liability well here goes – Releasing money from your estate lowers your estate’s value, therefore reducing any IHT that could be applied!  Oh yes… Equity Release is one of the very few ways to release money tied up in your home that would naturally contribute towards your estate and IHT.

Let’s show you some examples

Let’s say your property is worth £500,000, and you have £200,000 in investments, savings, and other assets (including your car and furniture). Your total estate is worth £700,000 (including your property). You also have no existing mortgages.  (Ok it’s an extreme example – who are these mortgage free people you ask? – but for the purposes of a clear example its easier to demonstrate, bear with me/us)

The Estate is worth £700,000 minus the threshold of £325,000 = £375,000.

Inheritance Tax is at a rate of 40%.

Total IHT to be paid: £150,000.

Now the good one with inheritance tax used

Estate (£700,000) – £300,000 Equity Release = £400,000

Less the basic threshold.

£400,000 – £325,000 = £75,000.

Inheritance Tax is at a rate of 40%.

Total IHT to be paid: £30,000.

Which one would you choose?  I think I/we can guess.

Another use for equity release could be to gift money.   See is more as an early inheritance to loved ones. Not only does this allow you to see your loved ones enjoy the use of this money before you pass, but it’s lowering your estate’s value and a lower-valued estate could reduce your IHT.

We have to warn you though. Gifting of money can be subject to IHT; however, if you live for seven years after the gift was made, there’s no IHT to pay at all but gifts made within seven years of death have rules on how much IHT can be charged. This works on a sliding scale from the full 40% if less than 3 years ago, 24% for 5-6 years and up to 7 then its 8%.

We’d always advocate anybody wanting to know more should speak with a Wealth Management Consultant and we have a trusted partner who can have those conversations with you and make sure you are making the best choices you can for yourself and your relatives if you don’t already have access to that person. 

Just one of the added benefits that our clients experience being with Aspire Accounts. Contact us to find out more about the benefits of being on our Team and us on yours!