Inheritance tax is due when a person’s estate is worth more than the Inheritance Tax threshold. The tax is currently set to 40%, although there are ways to reduce this. There is a threshold, however, so if a person’s estate is valued under £325,000 (current threshold as of Sept 2015), no Inheritance Tax is due.
There is a set of complex rules that determines how much Inheritance Tax is due.
Married couples or those in a civil partnership can leave their estate to their partner tax free. This is known as ‘civil partnership or spouse exemption’.
A single person can leave an estate of up to £325,000 tax free. If the estate of a single person is over this threshold, the Inheritance Tax due will be 40% of the total value (that is over the threshold) of the estate.
For married couples or those in a civil partnership the threshold can be carried over to the surviving partner, so the total threshold for a couple is £650.000 tax free.
When planning for Inheritance Tax, you should consider the different methods available to help reduce the amount due.
Some options are:
- giving gifts before you die
- including a donation to a charity in your Will
- set up a trust that you and your immediate family can’t benefit from
f you are considering giving money away before you die, it is important to remember that it will still be considered part of your estate for 7 years thereafter. Therefore, it will still be subject to Inheritance Tax if you die within those 7 years. However, if the gift is given over 3 year prior to death the Inheritance Tax for the gift is reduced. You can see a breakdown of the yearly reduction of tax on gov.uk.
Giving gifts is a good way to reduce your tax bill. If you are giving large gifts, beneficiaries can take out life insurance against the potential Inheritance Tax bill, however, each situation is unique and we suggest getting specialist advice in this area.
Gifts below the value of £250 are tax exempt.
If you donate over 10% of your estate to charity, Inheritance Tax is reduced (on some assets) from 40% to 36%. Charitable donations do not incur Inheritance Tax.
When calculating your Inheritance Tax, you show know that Inheritance Tax will cover the value of the following areas:
- Property/businesses you own
- Life insurance policy payouts.
Try using this Inheritance Tax calculator to see how much Inheritance Tax you owe.
There is a variety of ways you can pay Inheritance Tax, for example:
- Via your bank or building society
- Via cheque
- Via the deceased’s bank account
- Using National Savings and Investments
- Using British government stock
- Paying in yearly installments
- Via Trusts
In order for you to pay Inheritance Tax, you will need to apply for an Inheritance Tax reference number from HM Revenue and Customs at least three weeks before you make payment.
Once you’ve completed this step, visit gov.uk to find out which payment method is going to be most suitable for you.
There are a number of circumstances where a person’s estate might be exempt from Inheritance Tax. This relief is either tied to the deceased (for example a person who worked for the armed forces, emergency services or aid worker) or to the assets that are left behind (like a property that has rare historic interest). You can find out exactly what is exempt on gov.uk.
Inheritance Tax exemptions / relief
The appointed executor (what is an executor?) is the person(s) that deals with distributing the estate and making sure all tax due is paid.
The executor’s responsibilities are:
- collating all financial documentation belonging to the person who died
- sending a copy of the death certificate to the relevant banks and organisations to “freeze” the accounts
- open a new bank account on behalf of the estate, and moving all financial assets into this account (after the probate has been granted)
- calculate all money owed by the estate and deceased and paying this out of the estate
- calculate the worth of the estate (excluding any debts)
- calculating Inheritance Tax and paying the amount due out of the estate
- preparing and sending off the documents required by the probate registry and HM revenue and customs
- distributing the estate, as set out in the will or according to the rules of intestacy
In some cases the estate cannot pay for debts and tax. In these cases the person inheriting will need to pay for moneys due. This can be difficult and there are therefore a number of government schemes to help:
This is a one off payment of £2000 to the partner or spouse. To be entitled, the deceased must have been under state pension age when they died.
Some people are eligible for bereavement allowance for up to 52 weeks from the date their spouse or civil partner died. To be entitled they must over the age of 45 but under state pension age.
Widowed parent’s allowance
Some parents are eligible for widowed parent’s allowance if the spouse or civil partner has died and they paid enough national insurance contributions. The widowed parent must be under state pension age and be receiving or entitled to child benefit for at least one child.