An Easy Guide to Inheritance Tax

It was Benjamin Franklin that told us “The only things of certainty are death and taxes”, and in the case of Inheritance Tax, both are true. When someone passes away and leaves their estate to friends or family, an Inheritance Tax of 40% may be charged on what has been left to someone.

When you put together a Will, it is important to take Inheritance Tax into consideration when deciding on what to leave people. Inheritance Tax will not apply to every estate, and it can be a very complicated matter, which is why Lovedays Solicitors have put together inheritance tax advice that’s easy to follow.

How much is Inheritance Tax?

Inheritance Tax only applies if the value of your estate is above £325,000. Any estate which falls below this amount will not incur any tax. You will also not be liable for Inheritance Tax if you leave everything that sits above the threshold to your spouse or civil partner or an exempt beneficiary, such as a charity or community amateur sports club.

When it comes to giving away your home, either to your children or your grandchildren, then the threshold can increase to £500,000.

It is important to remember that if your estate totals more than the £325,000 threshold, it is only the part of your estate that sits above that threshold that is liable for the 40% rate of tax. For example, on an estate worth £525,000, only £200,000 will be taxable.

Valuing your estate

When putting together a Will, it can be difficult to know exactly what the value of your estate will be. It is therefore important to list all of your assets in order to try and work out what their value will be when you pass away.

The assets that you should include will be any money in bank accounts, plus property and land that is owned, as well as jewellery, cars, shares, insurance policies and any jointly owned assets. This is something which will be done by your executors at the time.

Once you have done this, you should then deduct any debts or liabilities that you think you might be leaving behind as these will decrease the value of the chargeable estate. It is important that you keep any records of how you worked out your values and deductions by including paperwork such as valuations from an estate agent, as HMRC can ask to see records as much as 20 years after the Inheritance Tax has been paid.

You will also need to include a list of gifts, such as cash or other assets that have been given away in the seven years before the person died.

Who is responsible for paying Inheritance Tax?

If a Will has been left, then the executor will organise the payment of the Inheritance Tax. However, if there is no Will, then the administrator of the estate will be responsible for this. It can be paid from funds within the estate, or any money raised from the sale of assets.

Most Inheritance Tax is paid through the Direct Payment Scheme, which means if the deceased had money in a bank account, the person dealing with the estate can ask for some of the Inheritance Tax to be paid directly from that account. In some cases, the deceased may leave money to pay Inheritance Tax, and this is usually arranged through a whole-of-life insurance policy. Once any tax and debts have been paid, the executor is then able to distribute what remains of the estate according to the terms of the Will.

Inheritance Tax must be paid by the end of six months after the death of the person in question. Failure to do so will result in an interest charge from HMRC.

Gifts and exemptions

Not everything that is left behind is subject to Inheritance Tax. Certain things, such as wedding gifts of up to £1000 per person and charitable donations, may fall into the exemption category. There can also be relief on certain types of properties, such as farms or any business assets. It is also important to remember that any gifts given in the seven years before the person died will be counted as part of the estate and likely to incur Inheritance Tax if relevant.

Reducing Inheritance Tax

In some cases, it may be possible to reduce the amount of Inheritance Tax that is due. This can be done by leaving a legacy to a charity or political party or by putting your assets into a trust for your heirs. Leaving your estate to your spouse or civil partner means that it will not be liable for Inheritance Tax, and paying into a pension instead of a savings account can also offer some protection.

You may also want to regularly give away gifts of up to £3000 a year as this will not be counted as part of your estate. You can also carry forward unused annual exemptions to the following tax year, but this is only possible on one occasion. It is also worth remembering that this is something which is available per person and so couples can combine their annual exemptions.

Record keeping

It is important to keep a detailed record of everything you do when it comes to the subject of Inheritance Tax. Whether it is obtaining valuations for assets or gifting, you should make sure that everything is recorded. This will make it much easier to calculate any Inheritance Tax that might be due and can reduce the stress that is put on your executors massively if you are able to demonstrate that you have stayed within the rules.

Inheritance Tax is not something that will affect everyone, but many people can be surprised at how easily their estate can creep above the £325,000 threshold. It is therefore important to be aware of what you are leaving behind and make plans in relation to this. You should therefore think about any gifts or donations that you want to leave either after your death or before it, and any contingency plans that you may want to put in place in order to deal with the issue of Inheritance Tax.