Inheritance tax or IHT is applicable to assets and money that remain after you die as well as to some gifts that you may make in the years before you pass away. Some assets are, however, tax-exempt or tax-free which means that ownership can be transferred free of tax or based on a tax-free allowance or according to a nil rate band. If you are an executor of a will, this information is essential.
For example, no tax is payable if you leave your estate to a spouse or civil marriage partner. The same process for filing HMRC forms to claim the inheritance is necessary except that no tax will be applied.
Currently, a tax-free allowance of £325,000 is applicable and this figure is set to remain the same for the coming years.
A residence allowance, in addition to the nil rate band, is applicable to property or interest in a property which served as the primary residence of the deceased during his lifetime (but not necessarily at the time of passing) when passed to direct descendants.
A direct descendant may constitute children, stepchildren, adopted/foster children, and/or grandchildren. A nil rate band is evaluated taking into consideration the total net value (which means after debt and other deductions) of the property or the interest that you may have in a property as well as the nil rate band maximum. The maximum nil rate bands currently start at £100,000 as of April, 2017 and are increased by £25,000 per person, per annum until 2020/2021 when it reaches a maximum of £175,000.
Inheritance Tax – Rates and Thresholds
If you are single (unmarried or not in a civil marriage), 40% IHT is payable on an amount exceeding £325,000 of the value of the estate including assets, property, investments and money but after expenses like funeral costs an debt.
As of October 2007, spouses (including those in a civil partnership) may pass their estate to the surviving partner tax-free and is allowed to use both of the tax-free allowances if one was not used at the first death.
IHT on Gifts
Inheritance tax may be due on gifts that you made throughout your lifetime especially those that form part of your estate or were made within a 7 year period before death. However, there are specific rules that are applied to determine whether a gift is taxable:
- If the gift was in and of itself tax-exempt or tax-free.
- If the gift was tax-free when it was made.
- If the gift was taxable when it was made but the tax may only become due later.
Who Pays the IHT Bill?
The amount that is determined to be due on Inheritance Tax is generally paid out of the estate. This includes everything you own including assets as well as money and investments but excluding debts and expenses such as your mortgage and/or funeral costs.
A person who received a gift from you while you were living or that formed part of your estate on passing, may be held liable for the IHT on the gift. This is if you died within 7 years of making the gift and gifted more than £325,000 in your lifetime. If this person is unable to pay the tax or simply will not make the payment, the amount will come out of your estate.
Planning for Death
Although it is never pleasant to think about the day you die, just a little planning can provide for your family and friends during this difficult time. Planning is even more crucial if you have people who are dependent on you. These dependents may be your children, spouse, parents, or employees if you own a business. It is of utmost importance to have a last will and testament in place, especially if you are unmarried and have joint property or children together.
It is also important to keep the practicalities in mind such as having life insurance, a contingency plan for your business as well as making your bank and online accounts easily accessible by providing passwords and login details.