Inheritance tax (IHT) is imposed on those who inherit money or property from a deceased estate as well as on certain gifts made by the decedent during the last years of his/her life. The rate will depend on the value of the inheritance as well the relationship of the beneficiary to the decedent.
A certain amount of assets can be inherited tax-free as a ‘tax-free allowance’ or on the ‘nil-rate band’. Assets left to a spouse or civil partner is usually tax-free, however, most of the HMRC forms required to be completed when inheritance tax is payable still need to be completed and filed – except that no tax payment is required. The tax-free allowance for the current tax year stands at £325,000 and is unlikely to change for several years.
In addition to the ‘nil-rate band,’ a residence allowance applies where the deceased has left his/her interest in a property which was at some time his/her main residence (but not necessarily at the time of death) to direct descendants including children, grandchildren, stepchildren, adopted children and foster children.
The residence ‘nil rate band’ is determined by calculating the net value of the property and comparing it to the maximum nil rate band applicable, with the lower amount being taxable. As of April 2017 the maximum ‘nil rate band’ started at £100,000 per person, increasing each year to a maximum of £175,000 by the year 2020/21.
Inheritance Tax Thresholds and Rates
An estate is defined as the value of property, savings, and any other assets that remain after all debts and funeral expenses have been paid. If a person leaves assets to heirs after death, they could be faced with a tax bill of up to 40% of the value of the estate. One of the ways to reduce inheritance tax is to give away money and assets during the course of your lifetime to prevent it from forming part of your estate that requires IHT to be paid.
Unmarried and not in a Civil Partnership
If a person is single and leaves an estate valued at more than £325,000 at death (including property, money, investments after debts and expenses) 40% inheritance tax will be levied on any amount above that.
Married or in a Civil Partnership
If a person is married or in a civil partnership, possessions and assets can be left to a surviving partner without paying inheritance tax. From October 2007 a surviving spouse or civil partner is allowed to make use of both tax-free allowances as long as a tax-free allowance was not granted at the first death as long as they, themselves, are not the executor of the will, in the UK.
IHT may be levied on gifts made during your lifetime in addition to normal inheritance tax on your estate, especially on gifts made within 7 years prior to dying. Specific rules apply to determine the following:
- Whether the gifts were tax-free in themselves at whatever time they were given
- Whether gifts are tax-free due to the timing of the gift;
- Whether gifts are taxable in themselves but tax may or may not have been due at the time when they were made.
Who is Liable for an Inheritance Tax Bill?
Inheritance tax will be settled from the estate after all expenses are paid. If you gave away gifts amounting to more than £325,000 during the last 7 years before your death, people who received those gifts may have to pay IHT. If recipients of gifts are unable to pay the tax or refuse to pay, the tax will be deducted from the estate.
Planning for Death
Planning for death is not something we like to think about, however, given a little thought and planning spouses, partners, relatives, and friends who inherit assets will better be able to deal with the practicalities of inheritance tax during the difficult time after our death.
It is of utmost importance to plan for your death if there are people who rely on you for their living expenses. This applies whether you are a business owner, a key employee, a spouse, have children, or dependent relatives.
One of the key parts of planning for your death includes making a valid Will. A Will is even more important if you are unmarried and especially if you and your partner own joints, assets or you have children together.
Other practical steps you can take to help make things easier for those you leave behind are:
- Ensuring that life insurance policies are in order and up-to-date;
- Making contingency plans if you have a business;
- Making your online accounts and passwords available to critical individuals.
If you are leaving an inheritance to one or more people, there is several things that you can do, to reduce the amount of IHT payable on your estate. As well as taking the necessary steps to ensure that, things run smoothly for your descendants after your death.