Inheritance Tax, also known as ‘IHT,’ refers to the tax paid on an individual’s estate after they die. How the inheritance tax works will depend on the value of the estate and the individual’s will. It is always recommended that you speak to a financial advisor in relation to Inheritance Tax and Inheritance Tax planning. Inheritance Tax and its potential complications and implications are one of the reasons why people may seek to sell a house fast for cash in the UK, with many people finding it easier to navigate the sales process over the IHT process.
The typical rate of Inheritance Tax is 40% in the UK and is charged on the portion and amount of value of the estate that goes above the Inheritance Tax threshold. Inheritance Tax in the UK covers property, money and possessions of the deceased person, all of which are covered by the scope of this tax.
What Is Inheritance Tax?
Inheritance Tax is a tax paid on the estate of someone who has died. The estate refers to any property, money and possessions after any debts and funeral expenses have been deducted.
Inheritance Tax is usually only paid if the value of the estate is above a £325,000 threshold. If you leave everything above the £325,000 threshold to your spouse, civil partner, charity or a community amateur sports club, there is no need to pay Inheritance Tax. This means that if you plan to pass on your assets after you die, your heirs could be met with a tax bill of up to 40% of the total worth of your estate. However, should you for example sell your property fast before you die, you may in some circumstances be able to navigate the process in a different manner.
How Much Is Inheritance Tax?
Since 2010-11, the tax-free inheritance tax allowance has been £325,000. Over this threshold, the standard inheritance tax rate is 40% of anything in your estate. For example, if your estate is worth £400,000, the tax will be 40% of £75,000 (the difference between £325,000 and £400,000). There can be some nuances to this process and the precise process may differ with regards to property value if the property is a leasehold rather than a freehold for example.
What Happens If the Value of the Estate Is Below the Inheritance Tax Threshold?
If the estate’s value is below the threshold you will still need to report it to HMRC. If the estate is worth less than the threshold, the remaining value can be passed on to partner, spouse or family member’s threshold.
What Is a Transferable Allowance?
When a person dies, a certain amount of their total estate can be passed on tax free. However, if they do not use this allowance, it can be transferred to their spouse or civil partner. This is known as a transferable nil rate band. Similarly, if the estate is worth less than the threshold, any unused value can be added to a partner or spouse’s threshold; subsequently, their threshold could be as high as £1 million. If you are leaving money to a family member, there is a transferable allowance of £175,000.
Where Is Inheritance Paid?
Inheritance Tax will be paid out of your estate to HM Revenue and Customs (HMRC). It will be done by the person who is responsible for dealing with the estate.
Those who inherit the state (the beneficiaries) are not likely to have to pay tax on the things that they inherit; however, they may have to pay related taxes – for example, if they have inherited a house in a will, they will need to pay tax on any rental income from that property. If you give away more than £325,000 as a gift, and die within 7 years, those who have received the gift will have to pay Inheritance Tax.
Do Spouses Need to Pay Inheritance Tax?
Generally speaking, married couples and civil partners are able to pass on their possessions and assets tax-free. After one partner dies, the surviving partner can use both tax-free allowances unless the first spouse used up their full inheritance tax allowance by giving away money in their will. Married couples or civil partners can pass on as much as £650,000 tax-free; this value can be as much as £1 million if the estate includes your home.
Can Inheritance Tax Be Avoided?
Gifts (or potentially exempt transfers) are a way of passing on money tax-free. As long as a gift is made more than seven years before the individual dies, and is to an individual rather than to a business or trust, this can be tax-free. If the individual does die within the seven years, the amount of tax payable on the gift will depend on when the gift was given.
Another way of avoiding inheritance tax is by putting your life insurance policy under trust. This means that you can assign trustees who will be legally obliged to manage your assets on behalf of your beneficiaries after your death. A trust deed will outline to trustees how you want your assets managed. Any assets in trust will not form a part of your estate; this means that they will not be included when calculating how much inheritance tax is due. However, you will need to live for seven years after placing any assets into trust.
Do You Pay Tax If You Pass On Your Home?
You can pass on your home to your spouse or civil partner when you die without the need to pay Inheritance Tax. If you leave the home to someone other than your spouse or partner, in your will, it counts towards the value of your estate.
The tax-free threshold can increase to £500,000 if you own your own home (or a share in it) and you leave the home to your grandchildren or children (including foster children, stepchildren or adopted children). The threshold will also increase if your estate is worth less than £2 million.
There is also the option to give away your home before you die. You may be able to avoid Inheritance Tax if you move out of the property and continue to live for another 7 years. You may therefore wish to invest in the property to make it bigger or more comfortable and to potentially increase its value for when it is sold. However, if you want to continue living in your property after giving it away, you will need to pay rent to the new owner, live there for at least 7 years and pay your share of the bills. If you die within 7 years of giving away your property, this will be classified as a gift and will be subject to relevant taxes.
