A Basic Guide to Inheritance Tax

Inheritance tax is taxation on possessions and money left behind when you die and on certain gifts, which you make in the years before you die. There is a certain amount of assets, which can be passed on, tax-free. If your assets are being passed to your civil partner or spouse, there will be no inheritance tax charged. However, it is important to note that the same HMRC forms will be required when inheritance tax is due or not. With tax-free amounts, they will generally change depending on the tax year. This is something that you will not have to worry about too much with inheritance tax because the tax-free threshold does not often change and it is part of the duties of an executor to ensure the applicable threshold is met.

You should also note that there is a residence allowance, which is over and above the standard nil rate bands. This will apply when the deceased leaves their interest in a property, which has been their main residence at some point to a direct descendant. The property does not have to be their main residence at the time of their death. The direct descendent will need to be their child, adopted children, foster children, stepchildren and grandchildren. Either the residence nil rate band will be the net value of the interest in the property or the maximum nil rate band depending on which is lower. The maximum nil rate band is £100,000 per person as of April 2017. This will increase by £25,000 every year after before reaching £175,000 by 2021.

People Who Are Not in a Civil Partnership or Married

If you are not in a civil partnership or married and pass away with an estate that has a value of more than £325,000, the inheritance tax will be 40%. The estate will include all money, investments, and property after the deduction of expenses such as funeral costs and debts. The tax will only be charged on the value of the estate above this threshold amount.

People Who Are Married or in a Civil Partnership

Civil partners and married people are able to pass their entire estate to their spouse or partner tax-free. As of October 2017, the surviving spouse or partner will also be able to use both tax-free allowances to the extent that one was not used at the time of death.

Making a Gift During Your Lifetime

It is important to note that inheritance tax can also be charged on gifts made during your lifetime. This is particularly true if you pass on within 7 years of giving the gift. There are a number of detailed rules that will be applied to the gifts and whether or not they are:

  • • Tax-free due to the timing of the gift
  • • Tax-free whenever they are made
  • • Taxable in themselves, but not taxable due to the time that the gift was provided

Who Pays the Inheritance Tax Bill?

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As the inheritance tax is payable on the estate that you leave, it is generally the estate which pays the bill. It is important to remember that the estate will be made up of everything that you own less the funeral expenses and debts such as a mortgage. If you have given someone a gift before you die, they will be liable for the inheritance tax if the gift has a value of more than £325,000 and you died within 7 years of giving the gift. If the person is unable or unwilling to pay the tax, the amount will be deducted from the estate.

Planning for a Death

Death is something that most people do not want to think or talk about. However, planning for this can help your relatives and partner deal with the practicalities of this during their mourning. It is particularly important to make plans if you have anyone who depends on you such as children, spouses, partners or a business partner.