Inheritance tax can seem like a minefield, however, it is important to understand what it is, how it works and how to calculate it. When someone passes away, it is really important that they have everything in place to ensure their family’s inheritance is secure.
Likewise, if someone has left you inheritance you’re probably keen to understand how inheritance tax works and how it will affect you. In this article we will unpack everything you need to know about inheritance tax.
What Is Inheritance Tax?
Inheritance tax, also referred to as IHT, is the tax you pay on the estate of someone who has died. The term ‘estate’ is a broad term, and it can refer to property, money, or even possessions such as jewellery, paintings or even furniture. When someone passes away, their estate will be passed onto the named executor in their will. If they did not have a will, then a family member or a friend can petition in a court to be the executor.
Will I Need to Pay Inheritance Tax?
Generally, you won’t need to pay inheritance tax if what you have left behind falls below the threshold value of £325,000. In addition, if you leave your estate (which is worth over the value of £325,000 threshold) to your spouse, civil partner, a charity or a community amateur sports club then you will not pay inheritance tax.
Keep in mind, however, even if your estate falls below this threshold or you leave your estate to these people or groups, you will still need to report it to HMRC.
Furthermore, if you leave money to your children, including adopted, fostered or adopted children then you will not need to pay inheritance tax on anything under £500,000.
Similarly, if you’re married or in a civil partnership then you are able to share a threshold. This means that if you die and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold. As a result, your partner’s threshold could be as much as £1 million.
For example, let us imagine you are married and your partner dies first. They might leave £100,000 to your children, they would pay no inheritance tax as this falls below the threshold. You could then use the extra £400,000 of available tax free inheritance to add to your threshold. This means when you die you could leave £900,000 to your children without paying any inheritance tax.
What Is the Rate of Inheritance Tax?
The standard rate of inheritance tax is 40%. This is only charged on any part of your estate that falls above the threshold.
For example, your estate is worth £600,000, and you plan to leave it to your children which means your threshold is £500,000. The £100,000 that falls outside of the threshold would be taxed. 40% of £100,000 is £40,000, so this money would be paid in tax. In total your children would receive £560,000.
There is the possibility of a reduced rate of inheritance tax if you leave 10% or more of your net value to charity in your will. The reduced rate is 36%.
Exemptions to Inheritance Tax
Sometimes gifts given while you were alive maybe taxed after your death. Taper relief might mean that the inheritance tax charge on the gift is less than 40%, but it depends on when you gave the gift. There are also business reliefs, which allows some assets to be passed on free of inheritance tax or with the reduced bill. Agricultural reliefs are also available if your estate includes farm or woodlands.
The best way to find out about these reliefs is to get in contact with the inheritance tax and probate helpline.
Who Is Responsible for Paying Inheritance Tax?
Inheritance tax is paid to HM Revenue and Customs (HMRC) and comes from the funds within your estate. The tax is paid by the person dealing with the estate, this might be the executor if there is a will.
Usually, the beneficiaries (the people who inherit your estate) do not pay tax on the things that they inherit. As a beneficiary, you may be responsible for other related taxes, for example, if you receive a rental income for a house that you are left in the will.
If you have received a gift from somebody who has died within 7 years of giving the gift, you may need to pay inheritance tax. This will only be the case if the gift exceeds the threshold of £325,000.
Remember, inheritance tax is sorted by the UK government so if you need any more information then visit https://www.gov.uk/inheritance-tax.
