Unless you plan carefully, the Government could take a hefty chunk out of the estate you leave to your family.
Under the current inheritance tax rules, everybody has a nil-rate band of £325,000 with any amount above this liable to tax at 40%.
Did you know... Spouses and civil partners can combine their nil-rate bands and leave £650,000 tax-free. You can also leave everything to your spouse in which case no tax is owed.
In addition, there is now a main residence allowance which stands at £125,000 for individuals who pass on their home to children, grandchildren, step-children, adopted and foster children.
It will rise by £25,000 a year to £175,000 in 2020. This effectively acts as an increase to the existing nil rate band.
This means a single person owning a home can currently leave tax-free wealth of £450,000 while a married couple can leave up to £900,000.
But what you must also know is the the own home allowance is removed gradually for those with estates larger than £2million.
At £2.7million and above it is gone altogether and the maximum that can be passed tax-free is £650,000 for a married couple.
However, there are ways to mitigate inheritance tax...
For example, you can give away up to £3,000 each tax year which is immediately exempt from inheritance tax.
If you did not make a gift of this kind in the previous tax year, you can gift up to £6,000 – £12,000 for couples.
You can also make small annual gifts of up to £250 to any number of people each year. If children are getting married, parents can give £5,000 while grandparents can give £2,500.
Regular gifts from income, such as meeting grandchildren's school fees, are free of inheritance tax as long as they do not impact on your standard of living.
Larger single gifts can also be made but for these to be free of inheritance tax you need to survive for seven years after making the gift.
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We hope you found this article helpful,
Newlife Wills team.