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A financial planner has warned about some of the common things people don’t understand when it comes to inheritance tax.
Megan Jenkins, partner at wealth management firm Saltus, warned the tax can be complicated for families to understand and there is no “one size fits all” for the levy.
She said her clients don’t understand how the nil rate bands work. She told Express.co.uk: “A lot of people don’t have a broad understanding of their nil rate bands.
“Most people understand that they have a nil rate band of £325,000. Not many people know what the residence nil rate band is, and how and when that applies.”
The tax applies to the total worth of an individual’s assets when they are inherited with no tax to pay on the first £325,000 worth of the estate.
A person’s allowance can be passed on to their partner or spouse when they die, effectively doubling it to £650,000 when the second partner dies.
But there is also a residential nil rate band of £175,000 when a property that was the person’s primary residence is inherited by a direct descendant.
Again, this can be passed on to one’s spouse or partner, doubling this allowance to £325,000 and meaning they can get a nil rate allowance of up to £1million in total applied to their estate when they die.
Ms Jenkins said families also often don’t know the details of the rules around gifting, to reduce the size of one’s estate and so reduce one’s inheritance tax liability.
She said: “The other thing that there is a general misconception around is the gifting rules, and gifting out of regular income in particular is one.
“Not a lot of people understand that it needs to be affordable and not impact their standard of living, it needs to be out of income, not capital, there’s all those nuances around gifting out of regular income.
“Gifting in general is something that people aren’t very clear on, for example what their annual gifting allowances are.”
A person can make gifts of any amount tax-free from their regular income as long as they can afford the payments after covering their usual living costs and they can make the payments.
An individual can also give away gifts worth up to a total of £3,000 a year divided among any number of people, as well as any number of gifts up to £250 to different people.
You can also give away gifts to a person getting married or entering a civil partnership, and a gift of a larger amount above the annual allowances as long as you survive for seven years after the gift is given.
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