Introduction
If you don’t understand tax, you’re likely to pay too much. This is especially true when it comes to Inheritance Tax (IHT). In this article Dr Ed Cantelo, GP, Chartered Accountant and Tax adviser, tells you what you need to know about estate planning for Inheritance Tax and explore legitimate ways to reduce the potential bill. He will also shed light on an important exemption that affects the families of healthcare professionals who tragically lost their lives due to the Covid-19 pandemic, relieving their estates from inheritance tax.
Inheritance Tax: An Overview
Inheritance Tax has been making headlines recently, with the tax revenue reaching a record-breaking £7.1 billion; forecasts suggest that this figure will rise to £8.4 billion by 2027-28 due to tax threshold freezes. While debates regarding the fairness and avoidance of this tax persist, our focus is to educate and empower healthcare professionals regarding their finances. Let’s delve into what inheritance tax entails and how you can minimize the tax burden on your estate.
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Understanding Inheritance Tax Rates
Inheritance tax becomes applicable upon an individual’s death and is levied on the value of their estate. There are two primary rates: 0% and 40%. The first £325,000 of the estate falls under the 0% rate, while any amount exceeding this threshold is taxed at 40%. Transfers of value made within seven years before death are also considered, and the inheritance tax due on such transfers is paid by the donee if tax becomes due.
Key Exemptions to Reduce Inheritance Tax
Several exemptions exist to help individuals reduce their inheritance tax bill. Here are five common exemptions:
- Annual exemption: Every individual can make chargeable transfers up to £3,000 per tax year without incurring inheritance tax. Unused allowances from the previous tax year can be carried forward one year to the current tax year.
- Small gifts exemption: Gifts of up to £250 to any one person in a tax year are exempt.
- Wedding and civil partnership gifts: Certain amounts given as gifts during wedding or civil partnership ceremonies are exempt from inheritance tax. A parent can gift £5,000 to a child getting married with no inheritance tax consequences, for example .
- Gifts to charities and political parties are exempt from inheritance tax.
- Normal expenditure out of income: Gifts made as part of normal spending habits and without impacting the donor’s standard of living are exempt. There is no limit on the amount as the government appreciates that different people’s standard of living is affected at different levels.
Importance of Professional Advice
To navigate the complexities of estate planning and inheritance tax, seeking advice from professionals is crucial. Accountants, Independent Financial Advisors (IFAs), and lawyers specializing in wills and probate can offer valuable guidance. Advisors familiar with the unique circumstances of healthcare professionals should be aware of specific exemptions and strategies to minimize inheritance tax. We can match you to a specialist medical Independent Financial Adviser here.
NHS workers killed by Covid are exempt from inheritance tax – but their families were never told
In 2015, an inheritance tax exemption was extended to “blue light workers” responding to emergency circumstances. Previously limited to the armed forces, this exemption now applies to healthcare professionals who tragically lost their lives to Covid-19 while serving on the pandemic frontline. Families of these heroes are entitled to 100% relief from inheritance tax. Awareness of this exemption is crucial, and families must apply for a refund from HMRC within four years of paying the tax.
Conclusion
While estate planning and inheritance tax may not be at the forefront of everyone’s minds, understanding these topics empowers healthcare professionals to make informed financial decisions. By taking advantage of the exemptions we’ve discussed, doctors can potentially reduce their inheritance tax liability. Additionally, it is vital that the families of healthcare professionals lost to Covid-19 are aware of the inheritance tax exemption and make a timely claim. Seeking advice from professionals specializing in estate planning is always recommended to navigate this complex area of taxation.
Where to get help?
It’s vital to get professional help and we can match you r unique circumstances to the best Independent Financial Adviser here.
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