Inheritance Tax - the basics
Not everyone pays Inheritance Tax. It's only due if your estate - including any assets held in trust and gifts made within seven years of death - is valued over the current Inheritance Tax threshold (£325,000 in 2012-13).
What is Inheritance Tax?
Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime. Most estates don't have to pay Inheritance Tax because they're valued at less than the threshold (£325,000 in 2012-13). The tax is payable at 40 per cent on the amount over this threshold or 36 per cent if the estate qualifies for a reduced rate as a result of a charitable donation.
Increased threshold for married couples and civil partners
Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2012-13. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die.
Who is responsible for paying Inheritance Tax?
Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceased's estate.
The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax - but this is not common.
Valuing an estate to see if Inheritance Tax is due
To find out if Inheritance Tax is due on an estate, you must first value the estate. This means adding up the value of all the assets in the estate - such as a house, possessions, money and investments - and deducting any debts the deceased may have owed, including household bills and funeral expenses.
An estate also includes the deceased's share of any jointly owned assets and the value of any assets held in trust.
You should also review any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren't exempt, include them in the overall value of the estate.
Inheritance Tax exemptions and reliefs
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:
- Spouse or civil partner exemption. Your estate usually doesn't owe Inheritance Tax on anything you leave to a spouse or civil partner who has their permanent home in the UK - nor on gifts you make to them in your lifetime - even if the amount is over the threshold.
- Charity exemption. Any gifts you make to a 'qualifying' charity - during your lifetime or in your will - will be exempt from Inheritance Tax. A donation to charity in your will may also reduce the rate that tax is paid at (see more in the link below).
- Potentially exempt transfers. If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.
- Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount - you can also use your unused allowance from the previous year but you use the current year's allowance first.
- Small gift exemption. You can make small gifts of up to £250 to as many individuals as you like tax-free.
- Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.
- Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.
Deadline for paying Inheritance Tax
In most cases, you must pay Inheritance Tax within six months of the end of the month in which the deceased died. After this, interest will be charged on the amount outstanding.
You can pay in yearly instalments over ten years if the value of the estate is tied up in property such as a house.
The due dates are different if you're paying Inheritance Tax on a trust.
Inheritance Tax and probate forms
You have to fill out an Inheritance Tax form as part of the probate process (or confirmation in Scotland) even if no Inheritance Tax is due. Different forms are used depending on where the deceased lived, and whether there is any Inheritance Tax to pay. You must pay some or all of any Inheritance Tax due before you can get a grant of probate (or confirmation).
How to pay Inheritance Tax
There are various ways to pay the Inheritance Tax due on an estate, including paying on account or paying in instalments.
This information is brought to you from the HMRC website
Please click the link for further information which will take you to their home page http://www.hmrc.gov.uk/
Join our mailing list
- The rise of asset allocation
- The FTSE at an all-time high - great news, provided your ‘home’ currency is sterling
- Payment scams – have the banks been let off the hook?
- Investing in LISAs may seem like a ‘no-brainer’ - but be alive to the rules
- Should we be worried about the UK’s £1.5 trillion personal debt burden?