Paying our taxes is a fact of life, and as we’ll see, is often a fact of death as well.
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who has died.
When is Inheritance Tax due?
In most cases, Inheritance Tax is only due:
- If the value of your estate is above the £325,000 threshold (often referred to as your Nil Rate Band or NRB); or
- If you DON’T leave everything to your spouse or civil partner, a charity, or a community amateur sports club.
There is also the added benefit that if you give away your home to your children (which includes adopted, foster or stepchildren) or grandchildren, your threshold (NRB) will increase from £325,000 to £425,000.
Transferable Nil Rate Band
If you are married or in a civil partnership and your estate is worth less than your NRB (i.e. less than £325,000 or £425,000, as noted above), any unused NRB can be added to your partner’s NRB when you die. This means that their NRB can be as much as £850,000. In other words, in the best case scenario, their estate would need to be worth more than £850,000 for Inheritance Tax to be due.
Inheritance Tax rates
The standard Inheritance Tax rate is 40%, but is only charged on the portion of your estate that is above your NRB. That said, your estate can pay Inheritance Tax at a reduced rate of 36% on some assets, if you leave 10% or more of the ‘net value’ to charity in your Will.
Your estate is worth £500,000 and your tax-free NRB is the standard £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000). Tax due in this example would therefore be £70,000.
Reliefs and exemptions
Some gifts you give while you are alive may be taxed after your death (if they were made within 7 years of your death). Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax due is less than the standard 40%.
Other reliefs, such as Business Relief and Agricultural Relief, also allow some assets to be passed on free of Inheritance Tax or with a reduced bill.
Who pays the tax?
Funds from your estate are used to pay any Inheritance Tax due to HM Revenue and Customs (HMRC). This is done by the person dealing with the administration of your estate (if you have a Will, this person will likely be referred to as your ‘executor’).
Your beneficiaries (the people who receive an inheritance from your estate) don’t normally pay tax on the things they inherit. However they may have related taxes to pay, for example if they get rental income from a house left to them in a Will.
People you give gifts to may also have to pay Inheritance Tax out of their own pockets, if you die within 7 years of those gifts, and your estate exceeds your NRB (when the value of the gifts is add back into your estate).
© Tim Taylor for Hastings Legal 2018
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