To see whether your estate will be liable to Inheritance Tax when you die, add up the value of everything you own, including your house, any investments, savings, personal property, and the value of any life insurance policies that form part of your estate (see Life Insurance on page 16 of this downloadable guide on how to avoid IHT on these).
Do not add on money in any pension funds. See page 16 of the guide for how that is dealt with.
If you own a business or shares in one or agricultural property, some or all of that may be exempt. See page 18 of the guide. Then add on any gifts of money or valuable items you have made in the past seven years (except gifts that are exempt).
From this total, take away any debts. These include a mortgage or equity release debt, any other loan secured on your home, any money you owe on credit cards, any personal loans or hire purchase agreements, and any unpaid bills, including any income tax you may owe. You can also deduct the reasonable costs of your funeral.
Finally, deduct the amount you intend to leave to charity. Once you have worked out the final total of your estate, the next step depends on your marital status and, from 2017/18, whether you have a home that you are leaving to your children, grandchildren or descendants.
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The situation in 2016/17
Definition: Anyone who is not married or in a civil partnership at the time they die. This includes divorced people and civil partners whose partnership has been dissolved by the courts.
If your total estate is worth £325,000 or less, then no tax will be due. If it is more than that threshold, it is likely there will be IHT to pay.
Strictly speaking the ‘threshold’ is called the ‘nil-rate band’, because on that band of the value of the estate the rate of tax is nil. It can also be called an ‘allowance’ – as you are ‘allowed’ to leave that much before tax is due.
Definition: Married or civil partners at the time the first dies.
If the first to die leaves everything to their spouse, which is now the recommended advice in almost all circumstances, the whole estate is completely free of IHT.
When the second member of the couple dies, there will be no tax to pay if the total is £650,000 or less. If your total is more than that, it is likely that there will be IHT to pay by your heirs when the second spouse dies.
Definition: Someone whose spouse or civil partner is already dead.
The tax-free amount depends on what the first to die left on their death. If everything was left to their spouse, no tax will normally be due on the first £650,000 when the widow dies.
If the late spouse left money or property to someone apart from the surviving spouse, the widow will be able to leave at least £325,000 and up to £650,000 to their heirs with no tax due.
The rules affecting couples and widows are explained in more detail in my guide to Taming Inheritance Tax.
For more tips and useful information, browse our money articles.
The situation from 2017/18
If you own your own home and have children, grandchildren, or greatgrandchildren to whom you are leaving your home, then the calculation will be a bit more complicated from 2017/18.
In addition to the £325,000 nil-rate band, you will be able to exempt a sum from your home if you pass it to your direct descendants.
This amount is called the residence nil-rate band (RNRB) and will be £100,000 in 2017/18, rising to £175,000 in 2020/21. This rule is explained in more detail on page 7 of the guide.
If the total is more than £650,000 the residence nil-rate band may reduce the tax, in some cases to zero. If not, there will be IHT to pay by your heirs when the second spouse dies.
The extra nil-rate band for the residence can also be passed on so the extra nil-rate band will be double the rates for a single person, rising from £200,000 in 2017/18 to £350,000 in 2020/21.
A widow with a home worth at least £350,000 will normally be able to pass on up to £1 million free of IHT to her descendants.
Download Paul Lewis' comprehensive guide to Taming Inheritance Tax.
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