When a wealthy individual passes away, the government stands to benefit from his or her estate by imposing taxes on the estate. Your estate will be assessed to find out how much it is worth. This would include property or businesses you own, cash in your bank account or investments. The value of your estate is then compared to the inheritance tax threshold; if it exceeds the threshold, a 40 percent tax is imposed.
Up to 325,000 pounds (nil-rate) of your estate’s value is not taxed. Any amount above this is subjected to the 40 percent tax or a 36 percent tax if at least 10 percent of your estate is donated to charity. However, there are certain steps that you can take to ensure that your family does not lose out on your estate when you are gone.
According to new regulations, any assets that you leave to your spouse or your registered civil partner who is UK-domiciled is not taxed. In addition, a couple can leave up to 650,000 pounds free of tax under the new regulations. When a husband dies, the nil-rate allowance of his wife is increased by the difference between the standard nil-rate allowance (325,000 pounds) and the amount he leaves to other individuals apart from his wife. This means that if he left everything to his wife, he would essentially double her nil-rate allowance.
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Another way that you could reduce the amount of inheritance tax is to give away portions of your money as gifts. However, if you die before seven years have elapsed from the time you give the gift, it will still be counted as part of your estate and inheritance tax will still be applicable. It is therefore advisable to begin distributing your assets early enough.
Even if you die within seven years of giving part of your money as a gift, the annual inheritance tax exemption would apply for the first 3,000 pounds. This amount is not considered part of your estate and is therefore not taxed. In addition, gifts made to charities or political parties are completely tax-free.
Any gift that does not exceed 250 pounds is excluded from inheritance tax. You could therefore distribute 250 pounds to as many individuals as you choose as long as this amount is not exceeded for each individual. In addition, each of them should only receive this amount once in any given year.
Gifts from your income are not considered part of your estate since inheritance tax only applies to assets. You can therefore give money regularly from your pension or other form of income, but enough should be left behind so your lifestyle is not affected.
A gift on consideration of marriage is also tax-free. In order to take advantage of this, you would have to offer a gift to an individual in exchange for their promise to marry your child. A parent could offer 5,000 pounds, while a grandparent could offer 2,500 pounds. The fact that the gift must be conditional on the marriage taking place definitely makes it difficult for most people to take advantage of this option.