How does inheritance work?
When someone dies, it is up to them if they want to leave you something for you to inherit. This will be drawn up in a will, which is a legal document that will have been signed by the deceased in the presence of a lawyer.
If you do inherit money, property or possessions, you may or may not be aware of inheritance tax. Inheritance Tax is a tax on the estate (so the money, possessions and the property) of the person who has passed away. Typically, you will not have to pay Inheritance Tax if either:
the value of the estate is priced below the £325,000 threshold
everything that is left by the deceased is to a lawful spouse or civil partner
everything that is left by the deceased is to a charity or community club
If the deceased leaves give away their home/property to their children (this includes children who are adopted, a step-child or a foster child) or grandchildren, the threshold then increases to the £425,000 mark.
If you are married or in a civil partnership and your estate is worth less than the threshold, any of the thresholds that is unused can then be added to your partner’s threshold hold when you pass away. For a partner, that means their threshold can be as much as £850,000 when they pass away.
Inheritance Tax Rates
The standard rate for Inheritance Tax is 40%. It is only charged on the part of your estate which is above the threshold discussed previously.
An example from GOV.UK is “Your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).”
If you leave 10% or more of the net value to charity in your will, the rate required for Inheritance Tax can be reduced to 36%.
Inheriting or giving away a home
As mentioned, you can inherit a home from a husband, wife or civil partner when they die without having to pay inheritance tax. Leaving your home to another person will count towards the value of your estate.
If you are wanting to pass on your home, there is also no inheritance tax to pay of you have moved out of the property and have lived for another 7 years afterwards. However, if you wish to continue living in your property after having pledged it away, you will need to:
pay rent to the new owner at a rate which depends on the similar local rental properties.
pay a share of the utility bills
live there for at least 7 years after you give it away
You can avoid the above by only giving away the property partially or if the “new owners” already live at the property or move in with you.
If you die within 7 years of signing away your home, it will be treated as a gift.
Usually, there is no Inheritance Tax to pay for small gifts that the deceased has made out of their normal income. These include birthday or Christmas presents. These are what is known as an ‘exemption gift”.
Likewise, there is no Inheritance Tax to pay on gifts between spouses or civil partners.
You are able to give away up to £3,000 worth of gifts per tax year without having them added to the value of your estate. This is known as your “annual exemption”.
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