NHS and emergency service workers who die in the line of duty fighting Covid-19 will be exempt from inheritance tax liability on their estates.
The exemption, which was originally introduced for members of the armed forces, was extended in 2015 to include the police, fire service and health care workers who are killed while carrying out their work.
The value of the exemption has been thrown into focus by the Coronavirus crisis, which has already taken the lives of many doctors, nurses and care workers.
There is concern, however, that some families may not be aware of the exemption and end up paying the full inheritance tax liability by mistake. They’re advised to consult their solicitor to make sure they don’t pay more than is necessary.
The exemption for emergency workers in this time of crisis is particularly welcome, but there also several allowances that are open to everyone.
Inheritance tax is set at 40% and becomes payable once the tax-free threshold of £325,000 has been passed. There is no tax liability if a person’s estate passes directly to their spouse. This exemption does not apply to their children.
The government recognised that more and more families are being caught by inheritance tax and introduced an additional main residence allowance of £125,000. It came into effect in April 2017 and only applies to a person’s home, not the rest of their estate. It was set to rise gradually to £175,000 by this year.
When added to the £325,000 nil-rate band for inheritance tax, this provides a combined tax-free band of £500,000. Married couples can combine their allowances. When one partner dies, their share of the estate is passed on to their spouse free of any inheritance tax.
This means that a married couple could have a combined allowance of £1m.
There are also other steps people can take to reduce the burden.
One helpful way to pass money on without inheritance tax implications is to adopt the ‘little and often’ approach. This allows you to give away £3,000 per year tax free. It’s a useful way to give money to your children without them running the risk of having to pay tax on it when you die.
There is also the ‘seven-year gift rule’ which allows a person to give money or assets of unlimited value. The recipient will not pay inheritance tax if the donor lives for at least seven years. If the donor dies within seven years of making a gift then the recipient could be liable to pay the 40% inheritance tax, depending on the value of the estate.
These are just some of the ways you could reduce inheritance tax liability. A little planning now could save your families thousands of pounds in the future.
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