Are you a business owner who is facing the complex and daunting process of dealing with an inheritance tax? You’re not alone—in fact, inheritance taxes can be tricky for even experienced entrepreneurs. However, understanding how these taxes work and how to manage them is important if you want to protect your financial future. In this blog post, we'll provide an in-depth look at what inheritance tax is all about so that you can make informed decisions when it comes time to deal with yours. Whether this is something entirely new or a subject that has been on your mind for years, our guide will have everything you need in order to navigate the process correctly.
HMRC tightens its grip over Inheritance Tax enquiries
HMRC is taking action in response to decreasing tax revenues. They've brought in a team of 3,000 new experts to keep a close eye on the Inheritance Tax in September 2023.
Business owners might be wondering how this will affect them, but one thing is for sure – these new hires will bring a wave of fresh energy and thoroughness to tax audits. Experts believe that the new workforce will do little help to business owners.
Now more than ever, precision is crucial in tax returns.
What is Inheritance Tax?
Inheritance tax is a type of taxation that applies to money and assets inherited from the estate of someone who has died. Understanding inheritance tax can be important for ensuring you do not pay more than necessary when inheriting an estate.
What is Inheritance Tax Threshold?
In the United Kingdom, there is a specific threshold of value before inheritance tax begins to apply. If an estate is worth less than £325,000 then no inheritance tax will be payable. Between £325,001 and £500,000, there is a sliding scale of taxation if the deceased left their estate to their spouse or civil partner. For estates worth more than £500,000 then the standard rate of 40% applies to the amount over that threshold.
How to avoid inheritance tax?
If you want to avoid inheritance tax, it is important to plan and take the necessary steps. Here are some strategies that can help you minimize or completely avoid inheritance tax in the UK:
Make a Will:
One of the most important things you can do to avoid inheritance tax is to make a will. This will ensure that your assets are distributed according to your wishes and can help reduce the amount of inheritance tax that your estate will be subject to.
In the UK, you are allowed to give tax-free gifts up to a certain limit each year. These gifts can include cash, property, or possessions. By giving away assets while you are still alive, you can reduce the value of your estate and potentially avoid inheritance tax.
Setting up a trust can be an effective way to avoid inheritance tax. By transferring your assets into a trust, they will no longer be considered as part of your estate and therefore not subject to inheritance tax.
Invest in Business Relief Schemes:
If you hold shares or invest in certain businesses that qualify for business relief, these assets may be exempt from inheritance tax. This is a complex area, so it is important to seek professional advice before making any investment decisions.
Make Charitable Donations:
Leaving a gift to charity in your will can also help reduce the amount of inheritance tax that your estate will have to pay. These donations are exempt from inheritance tax and can also potentially lower the rate of inheritance tax on the rest of your estate.
Consider a Life Insurance Policy:
Some people choose to take out a life insurance policy that will cover the cost of their inheritance tax bill. This can be a good option if you have a large estate and want to ensure that your loved ones are not burdened with this expense.
Do I have to inform HMRC if I Inherit Money?
Yes, you must notify HM Revenue and Customs (HMRC) when you receive a share of an inheritance. In most cases, the executor of the estate will handle this, but it is important to check that they have done so. Beneficiaries can be charged a penalty if the inheritance has not been declared.
Inheritance Tax and cash gifts
It is possible to receive a cash gift from the estate of someone who has died without paying inheritance tax. Cash gifts are only exempt if they are below the threshold and not part of the estate above that limit. It is important to be aware that cash gifts can be subject to income tax if they exceed certain limits, so it is advised to seek guidance to ensure you are paying the correct amount of taxation.
It is also possible for an individual to receive a tax-free cash gift from someone who has died if they have left 10% or more of their net estate as a charity donation. The exemption applies when gifts are given from a Will, with donors making sure that the gifts are restricted to specific beneficiaries or purposes.
Inheritance tax can be complex, so it is important to seek advice from an accountant or other financial professional before making any decisions regarding the handling of an inherited estate. Understanding how much you will need to pay in inheritance tax and when you are required to inform HMRC of the inheritance is essential for ensuring you stay within the law. With careful planning, it is possible to reduce or even avoid paying inheritance tax altogether.
In addition, understanding rules and limitations on cash gifts can also help individuals save money when inheriting an estate. Keeping informed about changes in taxation laws can be beneficial for reducing how much tax you need to pay.