What is the inheritance tax threshold and how does it work?
INHERITANCE tax may not be the most riveting of topics but paying attention to the rules and regulations could very well save you a fortune when you die. Here's everything you need to know about inheritance tax - including the threshold limit. Inheritance Tax is a tax on the estate - the property, money and possessions - of a person whos died. Theres normally no Inheritance Tax to pay if the value of your estate is below the 325,000 threshold. You can also avoid paying the tax if you leave everything above the threshold to your spouse, civil partner, a charity or a community amateur sports club. If your estate's value is below the 325,000 limit, you will still need to report it to HMRC. If you give away your home to your children - including adopted, foster or step children - or grandchildren when you die, your Inheritance Tax threshold can increase to 500,000. This is called the "main residence" band. If youre married or in a civil partnership and your estate is worth less than the upper limit, any unused threshold can be added to your partners when you die. This means their threshold can be as much as 1million. The standard Inheritance Tax rate is 40% - but it is only charged on the part of your estate thats above the threshold. The main residence band is an additional nil-rate band introduced when you pass your home onto a direct descendant. In 2021/22 the maximum that can be passed on tax-free is 1million for married couples or those in a civil partnership, 500,000 for others. For singles, this is made up of the existing 325,000, plus an extra 175,000. For couples, when the first one dies their allowance is passed to the survivor, so that 500,000 is doubled to 1million. On estates worth between 1million and 2million, inheritance tax will be paid as normal on the amount above the tax-free amount. On estates worth 2million or more, homeowners will lose 1 of the "main residence" allowance for every 2 of value above 2million. So for a couple, properties worth 2,350,000 or more will get no additional allowance. Source: Money Saving Expert  Legal ways to get around inheritance tax  If you leave 10% or more of the net value of your estate to charity in your will, there is a reduced rate of 36% on some assets. You can also give gifts while youre alive, however these will be taxed if more than 325,000 is handed out in the seven years before your death. Theres usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents - known as exempted gifts. Theres also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently. Putting assets into a trust for your heirs as well as paying into a pension instead of a savings account, will also help reduce inheritance tax. There are other reliefs too, such as business relief and agricultural relief where some assets can be passed on tax free. Funds from your estate are used to pay the tax and this is done by the executor of the will  the person dealing with the estate after the person has died. You might have to pay inheritance tax on gifts you have received before the person dies. This would only come into force if the person gave away more than 325,000 and died within seven years of giving the gift. Osborne to extend pension freedoms  We pay for your stories! Email us at tips@the-sun.co.uk or call 0207 782 4368. We pay for videos too. Click here to upload yours.