5 Things You need to know about Inheritance tax

The Inheritance Tax (IHT) is one of the most consistent sources of revenue for the government. According to official statistics1, IHT receipts received by HMRC during the tax year 2020-2021 totaled £5.4 billion and have maintained around that level for the preceding four years.

However, a large portion of the tax paid on the value of your estate after death is avoidable. It is feasible to mitigate and minimise most of the IHT you would otherwise pay with careful planning to guarantee full use of exemptions, gifts, and other tax-efficient investments.

Failure to make those preparations can severely diminish what you can pass on to loved ones. After the first £325,000, assets such as your family home, bank accounts, ISAs, jewellery, art, and antiques are subject to IHT at the regular rate of 40%. Dartford is well-known for its role in the industrial and cultural sectors. It's a major rail hub, and the main through-road now passes through the town itself rather than through it. Here is where you can start your business. Our best accountants in Dartford are here to make your start as simple as possible and your future bright.

Here are the five most significant facts regarding IHT that you should know but were too afraid to inquire.

1. Seeking counsel can alter your future.

IHT is a very complicated subject. You will not know every regulation, exemption, and allowance, as well as how to apply them — nor are you expected to.

Taking counsel can help you reduce your IHT as part of a larger plan for later life that includes retirement income, social care planning, giving money away while you're alive and passing it on after you're dead.

There is no set age for when you should begin preparing – it varies from person to person – but it will usually begin when your savings and assets begin to accrue. This could coincide with children growing less financially dependent and mortgage payments being reduced or eliminated.

Making a strategy keeps you avoid making rash decisions and lowers your chances of getting a negative tax surprise.

2. IHT thresholds and rates may differ.

Understanding how thresholds function can instantly reduce a large portion of your IHT bill.

• There is no IHT to pay, even if your estate exceeds £325,000, if you leave everything beyond that amount to your spouse, civil partner, charity, or community amateur sports club.

• If you pass your house to your children, stepchildren, or grandkids and your estate is less than £2 million, your tax-free threshold rises to £500,000.

• If you give away 10% or more of the net value of your estate to charity, you will pay a reduced IHT rate of 36% on certain assets.

3. Gifting is a simple approach to reduce your IHT.

Gifting allows you to support your family while decreasing your IHT liability. You can give away up to £3,000 every tax year (your "annual exemption"), as well as any number of minor gifts up to £250 per individual, without incurring IHT.

If you live for seven years, almost all gifts become IHT exempt. The following are the most important variables to consider:

• Gifts to your spouse or civil partner are tax-free during your lifetime or upon your death.

• Gifts to other beneficiaries are subject to a tax-free allowance of up to £3,000 per year. You can carry the allowance forward for one tax year, which means you can give away up to £6,000 in a single tax year.

• Gifts to children or grandchildren to pay for a wedding or civil partnership are exempt from IHT and are treated separately from the annual exemption of £3,000 You can give a child up to £5,000 or a grandchild up to £2,500. This is an excellent approach to pass on part of your estate's worth in the form of a donation you would have made regardless.

• Gifts made from your normal income are tax-free as long as you can demonstrate that they do not reduce your quality of living.

• If you survive for seven years after making the donation, gifts in excess of the allowance are exempt from IHT. Gifts made between three and seven years before your death that exceed the nil rate band are taxed on a sliding scale - this is known as 'taper relief.' The longer you wait, the less you will have to pay.

4. Pensions should be factored into IHT planning.

Most Defined Contribution plans will fall outside of your estate, so pensions could be part of the solution if you're searching for a tax-efficient approach to pass on wealth.

You may have many pension pots and wish to leave one or more to your children or grandchildren.

If you die before reaching the age of 75, your pension pot can be distributed as a lump sum or income to any beneficiary, tax-free. After the age of 75, beneficiaries must pay tax on withdrawals at their marginal rate.

5. Trusts allow you to keep control of your money while mitigating IHT.

Trusts are a classic aspect of IHT planning, and they continue to be an effective tool to ensuring that the right individuals receive the right money at the right time.

There are various types of trust and methods for establishing them. In certain circumstances, you can get the monies; in others, you can't.

After reading the post, if you have any questions about accounting in Croydon, please do not hesitate to contact Cruseburke Accounting Services.