An Overview of Inheritance Tax in the UK
Posted: Oct 29, 2015
Inheritance Tax is the tax that needs to be paid on the property and possessions (the "estate") of a person when they die if the value of their estate exceeds a certain limit. That limit, in the UK, is currently £325,000. Anything above that threshold is taxable at a rate of 40% but the amount can be reduced to 36% if more than 10% of the estate is left to charity. Clearly anyone considering bequeathing some amount to charity should think carefully about the amount and make sure this forms part of their current will.
Normally if you inherit something worth more than £325,000 then the tax is paid from the estate before your gift is paid, although this is not always the case and some tax may be deducted from your gift if that is the only way to meet the tax liability.
If you have been assigned as the executor of an estate you would not normally have any financial interest in it and so you would be responsible for calculating whether inheritance tax is due. This is one of the reasons why professional accountants are often involved in administering large estates.
Determining the value of an estate in the simplest terms is usually a matter of totalling the value of all property and possessions owned by the deceased person and then deducting any outstanding debts such as bills and, of course, the funeral expenses.
Remember that there are certain rules concerning the bequeathing of gifts during the lifetime of a person so if a gift was made less than 7 years before that person's death then it could be included as part of the estate and potentially liable to inheritance tax, depending on the value of the gift. If the total value of the gifts is less that £3,000 in any one year then they are exempt from tax if you die within 7 years. Higher value gifts are allowed to your children and grand-children when they marry or enter a civil partnership. There are also rules that mean you cannot, for example, give your home away but continue to live it it without paying rent and still enjoy all the benefits of owning the home.
Note that if the total of the estate is less than the current threshold for inheritance tax and so there is not tax to pay you will still be expected to fill in a number of relevant forms for HMRC.
Any tax that is due must be paid within the following 6 months but if the deceased person's affairs are complicated then it can sometimes take longer than 6 months to sort it all out. In cases such as these it is possible to avoid interest penalties from HMRC by paying an amount of tax based on estimates of the amount that will be due.Inheritance Tax Exemptions
There are a number of important exemptions to the inheritance tax rules where an estate is above the current threshold. These are:
- Leaving your estate to your spouse or civil partner or your death and leaving gifts to them whilst still alive will not be liable for any tax. But be aware that this might increase the tax liability in the future of the spouse or civil partner's beneficiaries so always take the advice oflondon accountants
- Make gifts in your will to charities and a number of other organisations such as museums, universities, community amateur sports clubs and the National Trust are all exempt from inheritance tax.
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