When do you have to pay inheritance tax, how is it worked out and what exemptions can you use?
Inheritance tax is paid on the estate of a person who has died. A persons Estate can include Property, money, shares, insurance policies, pensions ect. Any assets that can add value to a persons Estate should be considered when working out inheritance tax.
When do you have to pay inheritance tax?
There is normally no inheritance tax to pay if you leave your entire estate to a charity or a community amateur sports club.
The personal Inheritance tax allowance is currently set at £325,000. If the total value of an estate is below this threshold there is normally no tax to pay.
There is also not normally any inheritance tax to be paid when you pass your entire estate to your spouse. However this will increase the value of your spouse’s estate upon their death which can result in their estate being worth more than their personal allowance of £325,000.
When you leave your estate to your spouse you do pass your £325,000 allowance onto them. This is called a nil-rate band transfer. Any unused allowance can be added to their threshold upon death. Therefore upon the second death you would be able to use your £325,000 allowance and your predeceased partners allowance giving you a higher threshold of potentially £650,000.
The residential nil rate band was introduced in April 2017, this allows an extra £175,000 tax free allowance to be used when a property is being passed to your children (including adopted, foster or stepchildren) or grandchildren. As with the nil rate band any unused residential allowance can be passed between spouses resulting in a potential nontaxable allowance of £1,000,000.
Some estates may be eligible for business relief or agricultural relief however these areas can be extremely complicated and it is highly recommended that you seek the advice of a professional to make the correct use of these exemptions.
Who is responsible for paying inheritance tax?
It is the duty of the executor or administrator of the estate to work out how much tax is payable and insure that it is paid to HMRC. Some or all of the inheritance tax must be paid within six months of the person’s death. If it is not paid HMRC will start charging interest. The executor/administrator is responsible for ensuring that the inheritance is paid from the estate.
In most cases Inheritance Tax is paid out of the deceased’s estate before it’s distributed to the heirs. Therefore the beneficiaries will not have to pay additional tax on what they inherit.
However there are some cases where a beneficiary will have to pay tax related to what they inherit, for example if they inherit a rental property they would pay tax on the rental income.
People who have received gifts of £3000 or more within 7 years of the death may also have to pay inheritance tax on any gifts if the deceased’s estate is more than £325,000. However depending on when the gift was given can affect the amount of tax payable. This is called ‘Tapered Relief’ meaning you will pay less tax on a gift given 5 years prior to the death than you would on a gift given 1 year prior to death.
How much is Inheritance Tax?
Inheritance tax is charged at 40% but only on the amount that is above the inheritance tax threshold.
For example, on an Estate worth £400,000 using a singular allowance of £325,000, inheritance tax would be payable on the £75,000 that is over the allowance. Therefore 40% of £75,000 would be £30,000.
In some cases you can pay Inheritance Tax at a reduced rate of 36% on certain assets if you leave 10% or more of the ‘net value’ of your estate to charity in your will.
If you are the Executor of an Estate speak to a member of our team on 08007318722 or send us an inquiry via our website.