As a contractor, we know that you’ll want to make the most of your hard-earned cash now and in the future – and why not?
That’s why Inheritance Tax is one of the key pieces of legislation to be aware of – as it could end up costing your loved ones thousands of pounds if something happens to you. Fear not though, as it’s legally possible to avoid paying large chunks of it – if you know how.
Of course, we understand that you probably won’t have time in your busy WorkStyle researching how to go about this. That’s why we’ve created this handy guide.
How does inheritance tax work?
When you die, the government will estimate how much your estate is worth. This includes money in the bank, investments and tax-free ISAs – plus any property or businesses you own. If you have any debts, these are deducted to give a final valuation.
How much is inheritance tax?
If the valuation exceeds the current Inheritance Tax threshold of £325,000, your estate will pay 40% tax on anything above this amount. You could lower this to 36% if you donate at least 10% of the excess to charity.
This means that if your estate is valued at £600,000, you’ll be charged no Inheritance Tax on the first £325,000 and 40% on the remaining £275,000 – assuming you’re not donating anything to charity.
What if I’ve been widowed?
If you’ve been widowed, you may be able to claim a further exemption of up to £325,000. This depends on how much your spouse or civil partner left to people other than you.
Am I exempt if I’m married?
When you die, anything you leave to your spouse or civil partner is exempt from Inheritance Tax. If you don’t use up all of your £325,000 exemption, the remaining amount will carry over to them as well.
So, if you leave a total of £200,000 to your family members, the remaining £125,000 of your exemption will pass on to your partner. This means that their exemption will increase to £450,000 before they are charged Inheritance Tax.
This is more complicated if you or your spouse/civil partner doesn’t live in the UK – so it’s worth speaking to the experts (such as ourselves) to find out how you’ll be personally impacted.
Family home allowance
As of April 2020, everyone will have an additional allowance of £175,000. This will bring the individual Inheritance Tax threshold up to £500,000.
Other ways to reduce your tax bill
One of the main ways to reduce your bill is to make potentially exempt transfers (PETs) throughout your life. Any gifts made seven years prior to your death won’t be counted as part of the final estate valuation – something that’s particularly useful when it comes to assets that increase rapidly in value (such as property).
It’s vital that you don’t retain any sort of free benefit on the items you gift – meaning you won’t be able to live rent-free if you give away your house.
Another way to reduce your tax bill is to make use of your annual gift exemption. The first £3,000 you give away each year is tax-free, along with any gifts under £250 in value.
Transferring assets to children
If you’re worried about passing on wealth to your children when they’re too young or financially inexperienced, you can transfer your assets to a trust that can be accessed at a later date.
The importance of leaving a will
One of the most important things to do when planning for the future is to leave a valid will. This ensures your assets will go to your chosen beneficiaries, rather than the state. After all, you don’t want to end up paying more tax than you need to, or to risk your valuable assets getting into the wrong hands.
Want more inheritance tax advice?
We hope this guide has helped you understand the basics of Inheritance Tax. But with so many options available, we understand that you’ll want to speak to an expert to work out the best solution for you.
At ClearSky Contractor Accounting, we’re with you all the way through your contracting career – including providing expert advice on how to reduce your Inheritance Tax liability.
Our dedicated team is on hand to answer any queries you may have, ensuring your assets go only to your beneficiaries and helping your family save thousands of pounds in tax.