No one wants to pay inheritance tax, but the unavoidable truth is that when some dies and leaves and estate valued at more than £325,000, tax is paid on the balance.
To calculate how much tax is due, work out your net worth by totting up the value of your assets, like property, investments, savings and any life insurance.
Then add up all the money you owe – such as credit cards, mortgages and loans.
Subtract the debts from the value of your debts from your assets to give some idea of your net worth.
This is a simplified calculation. The asset value should also include cars, art, jewellery, antiques and any other valuable possessions.
Financial inventory of your life
Think of the inheritance tax calculation as taking a financial inventory of your life.
That estate value is the crucial figure.
- If you are single, take away £325,000. That’s the amount of money you can pass to family, friends and other loved ones without paying any inheritance tax.
- If you are married, things are slightly different because the married couples and civil partners can double up to £650,000 before inheritance tax is due.
Inheritance tax is charged at 40% on the value of the estate over these thresholds.
So, a single person with a £1 million estate pays tax of £270,000 (£1m – £325,000 x 40%), while a couple would pay £140,000 (£1m – £650,000 x 40%).
The amount of inheritance tax can be reduced with some smart financial planning.
The rate tax is paid can drop to 36% if 10% of the net estate is left to charity.
Planning for the inevitable
Other strategies for paying less inheritance tax include giving away cash and possessions during your lifetime and putting assets into trusts.
Another way of shielding your loved ones from inheritance tax is life insurance.
If you know how much the tax liability is likely to add up to for your estate, you can deduct £325,000 and arrange life cover for the rest. The policy should be written in trust so the full value stays outside the estate.
When you die, the policy pays out and covers the inheritance tax due on the estate so your beneficiaries can inherit the full value.
Sometimes this can be expensive. It’s not unknown for families to group together to help out with the cost as they stand to gain from the inheritance anyway.
