Tax bills can have a way of creeping up on you. One that really shouldn’t is Inheritance Tax which has been described as a ‘voluntary tax’. This is because during your lifetime you can implement plans which can reduce the size of your estate on death such that no Inheritance Tax is payable. Yet HMRC reports that in 2017/18 there were 24,200 UK families who were faced with an Inheritance Tax bill because proper planning had not occurred, or plans were made too late.
It is not a difficult job to check your current Inheritance Tax position. This is something that is worth doing every year because our financial circumstances can change. So I thought that my blog followers might appreciate a straightforward way of doing this. Of course the legalistic among us might complain that what follows is too simplistic but it will cover 95% of our situations and if it doesn’t then you really should be talking to a financial adviser to help with your planning.
If you are single, widowed or divorced then the calculation below is the most straightforward. If you are currently married or in a civil partnership then the calculation assumes that you have already died (sorry!) and that this is the situation on the death of your spouse. This is because in most cases the spouse exemption means that there is no Inheritance Tax to worry about when the first person in a marriage dies. I did say in most cases as I don’t want us to miss the wood for the trees.
You can use the table below and I have included a fictitious example to help you along.
First you need to calculate the total of your assets
Then you need to deduct your liabilities
This gives you the total value of your estate if you had died yesterday
If you have a business, or a farm or you are leaving money to charity you can make a further deduction
You now have your total taxable estate
Part of your estate is taxed at a Nil rate
The result is your net chargeable estate
Finally HMRC will require tax on this at 40%
Well done if you have got this far. In the example just given, if the person were to have increased their charitable giving from £15,000 to £25,000 (i.e. 10% of their net chargeable estate) the inheritance tax due would reduce from £100,000 to £86,400. The gift to charity of £25,000 would therefore have only cost their heirs £11,400.
For more information on Inheritance Tax and how you can plan for it see Inheritance Tax
There follows a quote for those who enjoy paying tax
|I don’t see why a man shouldn’t pay an inheritance tax. If a Country is good enough to pay taxes to while you are living, it’s good enough to pay in after you die. By the time you die you should be so used to paying taxes that it would just be almost second nature to you.
Will Rogers, American actor and social commentator, 1879-1935