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 wealth resting permanently among a handful of wealthy families to the exclusion of the poor.
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 significate 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, ie 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, the remaining
£100,000 would be taxed at 40%, so
£40,000 would be owed in Inheritance Tax
The tax-exempt sum can be less if significant gifts have been made in the 7 years before death, as the sum of any gifts made less than 7 years before you die can be deductable from your £325,000 allowance. The allowance can, however, be greater if the deceased leaves a residential property to the spouse or children, and the percentage rate payable can be reduced if a significant donation is made to charity, see below.
Will the Inheritance Tax threshold change in 2019/2020?
In April 2020, the Inheritance Tax threshold will change under current legislation, and will include the final tier of a Residential Nil Rate Band that means that some estates can have £1million before inheritance tax is payable. However this is only available if the first spouse has already died and left the whole of their estate to the second spouse. Even then there are further other conditions such as the situation with any residential property owned by the couple, and who the spouse’s beneficiaries are. We recommend that anyone that has previously inherited from a spouse seek advice as to how this change may affect their estate.