Inheritance tax (IHT) is a tax of 40% that may be due on assets you wish to pass on after your death. However, roughly only 6% of estates have any inheritance tax to pay. This is because most estates are either under the inheritance tax threshold (the nil rate band – currently set at £325,000, or higher, if the estate includes a main residence that is to pass to children or grandchildren), or they are being passed to people who are exempt from inheritance tax.
If you are married or in a civil partnership, anything you pass to your partner in your Will is exempt from inheritance tax – provided that your partner is domiciled in the UK. In addition, any gifts to a registered charity are also exempt from inheritance tax.
Any assets you give to people who are not exempt will be liable for inheritance tax to the extent that the value of the assets given exceeds the tax-free allowance.
When you make a gift in your Will, you can specify whether it is to be free from or subject to inheritance tax. But you will need to bear two things in mind:
If your estate overall is subject to tax, declaring that a particular gift is to be tax-free Will mean that the tax is payable from the residue.
You cannot leave your residuary estate tax-free. It is an overriding obligation to pay inheritance tax due on your estate before assets can be distributed.
You can reduce the size of your estate by making gifts of your property during your lifetime, but there are various rules which limit these.
Planning your affairs so as to reduce the amount of inheritance tax payable by your estate is an essential part of preparing to draft your Will. So calculating the approximate value of your estate is a good idea.