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Wills, Probate & Trust

Inheritance Tax and What You Need To Know

Tuesday, April 23, 2024

Phil has elderly parents who are becoming increasingly concerned about inheritance tax as they get older as they want to ensure that their loved ones are taken care of after they have gone. Inheritance tax can be complicated, and it is therefore important to seek proper advice to ascertain ways to mitigate your tax liabilities.

Inheritance tax is the tax that your estate may have to pay when you die, and it is based on the value of your assets. It is important to note that if inheritance tax is payable, it is the named Executor or personal representative’s responsibility to pay this within 6 months of the date of death.

Each individual has a tax-free allowance of £325,000 meaning there is no inheritance tax to pay if the value of your estate is below this amount. As we have seen housing prices rise massively in the last few decades, it is not uncommon for individuals to see this figure and worry that their estate may be liable to pay a hefty inheritance tax bill when they die.  However, there are certain exemptions and reliefs available to alleviate this.

Firstly, if Phil’s parents are married and they wish for everything to go to each other in the first instance, there will be no inheritance tax to pay on the first death as any transfers made between spouses are wholly exempt from paying inheritance tax. Any unused nil rate band from the first spouse can also be added to the surviving spouse’s estate when they subsequently die.

Additionally, if Phil’s parents own property and intend to leave this to Phil in their Will, they may qualify for the residence nil rate band (RNRB) which enables them to leave a further £175,000 free of inheritance tax subject to the value of their home. This is a complicated allowance and if you think that you may need to rely on it, it is important that you seek appropriate advice.

Phil’s parents have also considered whether it is worth gifting their property to Phil during their lifetime to avoid paying inheritance tax. This is a risk that Phil’s parents may wish to take, however, if they do not outlive that gift by 7 years, the value of that asset would still be considered in any inheritance tax assessment in any event.  An outright gift of property such as this may also present a whole host of problems if Phil were to become subject to bankruptcy or divorce proceedings.

Phil’s parents could also consider leaving charitable gifts in their Will to reduce the taxable value of their estate as gifts to charity are exempt from Inheritance Tax. As well as this, if they were to leave 10% or more of the value of their estate to charity, this can help to reduce the rate of their taxable estate from 40% to 36%.

If you have concerns about inheritance tax, please do not hesitate to get in touch with the Wills, Probate and Trusts team here at Samuel Phillips on 0191 232 8451 to get booked in for a free initial consultation.

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