Inheritance Tax: The Facts
The old saying goes that there are only two certainties in life: death and taxes. Never is this more true than with inheritance tax, which is paid on the estate when someone dies. Here are the important facts you need to know about inheritance tax.
Understanding Inheritance TaxWhen a person dies, their possessions (for example, property, savings and investments) are from then on known as their ‘estate’. Inheritance tax is the charge made by the government on a person’s estate, and it earns the government a figure estimated at more than £4bn every year.
Who Pays Inheritance Tax?Inheritance tax is not paid on every estate, and only applies to an estate with a value over the current inheritance tax threshold of £312,000.
What is the Current Rate of Inheritance Tax?Inheritance tax is paid at a rate of 40%, the same as the higher earner income tax threshold.
Who is Responsible for Paying Tax on an Estate?Usually the inheritance tax charge will be paid by the executor of the person’s estate. The tax is usually paid using funds from the deceased person’s estate.
What Assets are Taxable?If an asset is considered to have any saleable value, it will be classified as liable for inheritance tax. Assets can be quite sizeable, such as a family home, land, cars or even a business. Smaller items such as jewellery, furniture, even fixtures and fittings within a home can also be considered as assets forming part of an estate.
Remember that any payouts from life insurance policies or death in service payments will also be included as part of the deceased’s estate.
How Should You Value an Estate?If you are trying to find out whether inheritance tax will have to be paid on an estate, the first step is to value the estate, by calculating the total value of all assets. From this total you should also deduct any debts that were owed by the deceased, such as credit cards, loans and mortgages, and also including funeral expenses.
You might also need to consider whether the deceased made any gifts in the past seven years of their life that might also be included as part of their total estate.
Inheritance Tax ExemptionsThe Inland Revenue uses the ‘seven year rule’ to ensure that people cannot sign-over their assets to family and friends in order to avoid paying inheritance tax. The good news is that you are legally entitled to pass on certain assets without facing a charge.
The prime example of this is the Spouse (or Civil Partner) Exemption. A person’s estate will not have to pay inheritance tax on anything left to a husband, wife or partner, providing they have a permanent home in the UK. Of course inheritance tax will be payable on that asset once the partner is deceased.