Inheritance Tax

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What is Inheritance tax

What is Inheritance Tax?

Inheritance Tax is the tax that is paid when you die if you leave assets (including property) that total more than £325,000 (although money given away in the seven years before you die can be added to this).

In many cases, the allowance will be more than £325,000, but this will depend upon whether you own your home, have inherited from a spouse, and who your beneficiaries are.

Why do we pay Inheritance tax

Why do we pay Inheritance Tax?

Inheritance tax is the modern incarnation of ‘death duty’, and was originally introduced in the late 18th century.

The aim was to raise revenue for the government and to redistribute wealth among society by preventing the country’s most fortunate from keeping riches in the family.

How much is Inheritance Tax?

The rate that Inheritance Tax is charged at is 40%. So if £100,000 of your estate is above the exemption allowance threshold, then the tax will be £40,000. However, this rate can be reduced if a significant portion of the estate is left to charity.

How do I work out the Inheritance Tax due on an estate?

There are formulas that are applied as not all of the tax is payable at once. The basic calculation is 40% of the part of the estate that is subject to tax, i.e. the balance above the exemption allowance, see below.

How much can I have before I pay Inheritance Tax? What is the Inheritance Tax threshold?

The basic threshold is £325,000. So if you were to leave a sum of £425,000, £325,000 would remain untaxed. With the remaining £100,000 being taxed at 40%, £40,000 would therefore be owed in Inheritance Tax.

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How do i pay inheritance tax

How do I pay Inheritance Tax?

A portion of Inheritance Tax is payable before the Grant of Probate is issued, and therefore must be raised before there is access to the deceased person’s assets.

It will depend upon the circumstances as to how this can be raised. Using a solicitor will make this easier.

What ways can I pay Inheritance Tax?

Inheritance Tax is payable before the Grant of Probate is issued, and so before there is access to the assets of the deceased person. The beneficiaries can loan the estate the money, or it may be that the deceased person’s bank will advance it if there is enough there.

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What paperwork is required to pay Inheritance Tax?

There are a series of Inheritance Tax forms produced by HMRC that are required to be completed before an application for a Grant of Probate can be applied for where the estate is over a certain limit, even if the result is that there is no Inheritance Tax to pay.

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How long does it take to pay Inheritance Tax?

How long it takes to pay Inheritance Tax will depend entirely upon the circumstances of the assets and situation with any given estate.

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When is Inheritance Tax due?

Inheritance Tax is due before the Grant of Probate application and in any event within six months of the date of death.

Who is responsible for making the inheritance tax payment when I leave money to a loved one?

Your executors are responsible for paying the Inheritance Tax from the money in the estate. If you need further details on how to appoint an executor we discuss it in detail on our wills page.

What is the 7 year rule for inheritance tax

What is the 7-year rule for Inheritance Tax?

The 7-year rule is that most gifts made within seven years of death are added back to the estate and that total is then the value of the estate for Inheritance Tax purposes.

The tax attributed to those gifts is on a sliding scale depending upon when it was made. There are some gifts that are not added back in, but this depends upon various factors as to how those gifts were made.

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How can i minimise the inheritance tax paid by my estate

How can I minimise the Inheritance Tax paid by my estate?

There are ways to minimise Inheritance Tax paid by your estate by tax planning before your death. This must be done with careful advice and will vary from person to person depending upon your circumstances.

It will include making significant gifts but without retaining any benefit in those gifts. So, for example, you cannot gift your own home and continue to live in it to remove it from your Inheritance Tax.

What gifts are exempt from Inheritance Tax?

There are certain gifts that are exempt from being drawn back into the estate under the 7-year rule.

Each person is currently able to gift £3,000 a year and this will be exempt even with seven years of their death, in addition to other smaller gifts on birthdays and marriages (known as ‘exempted gifts’).

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What forms of Inheritance Tax Relief Exist?

Other forms of tax relief are also applicable under cerain circumstances. ‘Taper Relief’ might mean the Inheritance Tax charged on taxable gifts is less than 40%.

‘Business Relief’ can exempt or reduce tax on the transfer of business asset upon death. Similarly, ‘Agricultural Relief’ can apply if you leave behind a farm or woodland.

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Im married how does this affect inheritance tax

I’m married – how does this affect Inheritance Tax?

If you are married, and leave your estate to your spouse or inherit from your spouse, then there will not be any inheritance tax.

However, the monies that you leave to others remains subject to taxation at the normal rate.

Inheritance tax death in service life assurance

Inheritance Tax & Death in Service Life Assurance

Death in Service Benefit and Life Assurance is often outside of the estate and therefore not liable for Inheritance Tax, but this will depend upon the way in which this is arranged before you die.

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What happens to inheritance tax if someone dies outside the uk

What happens to Inheritance Tax if someone dies outside the UK?

If someone dies outside of the UK it will depend upon where their domicile is as to whether they pay UK inheritance tax. Other factors, such as where their assets are, will also play a part.

Every country has its own inheritance tax laws, and the arrangement that the UK has with each of these countries varies.

What other taxes could beneficiaries in my will have to pay

What other taxes could beneficiaries in my will have to pay?

During the administration of your estate, your executors will have to deal with your income tax and capital gains tax up to the date of your death, as well as any income tax or capital gains during the time that the assets are being dealt with.

Executors should take care when selling assets, as this can give rise to a taxable capital gain, and this tax has to be passed on to the beneficiaries.

Where can i get help with my inheritance tax

Where can I get help with my Inheritance Tax?

Inheritance Tax planning should be dealt with at the same time as making a will, and should be done with your spouse or partner. It is strongly advised that this type of advice is sought from a qualified solicitor who will seek to maximise the opportunities to lower the burden of inheritance tax.

No one has a crystal ball to know when that day will come, and so Inheritance Tax planning can be tricky. It is also crucial that any advice you receive is updated regularly, as your own circumstances change and tax laws evolve.

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