Inheritance tax - your questions answered
Posted by siteadmin on Thursday 1st of July 2021.
When a person passes away, their estate is often left behind for those closest to them to manage. This includes notifying all the relevant people of the person’s passing, repaying any obligations left unpaid and organising the inheritance process.
A key part of managing inheritance is inheritance tax – it’s crucial that any tax obligations are met once a person passes away.
Here’s our answers to the top four questions you may have about inheritance tax:
1. How does inheritance tax work?
Inheritance tax (or IHT) is a tax on the estate of someone who has passed away. This includes all property, possessions and any remaining funds in bank accounts. Generally, if inheritance tax is payable, it is worked out as a percentage of the total value of the estate above the inheritance tax threshold. Even if the estate is below the threshold, and therefore no IHT is payable, HMRC still need to be notified.
2. Who is responsible for paying inheritance tax?
IHT should be arranged to be paid by whoever is dealing with the estate. If there is a will, this will be the executor of the will. If the person who passed away has no will, IHT should be arranged to be paid by the administrator of the estate.
Any beneficiaries (or people who inherit from the estate) are generally not required to pay IHT on the things they inherit. However, they may have related taxes to pay, for example, if they receive rental income from a house left to them in a will.
Anyone who is gifted part of the estate may be required to pay inheritance tax if the person who has passed away gifts more than £325,000 (tax year 2021/2022) or has gifted a large sum within the last seven years, before passing away. For further guidance on taxing on financial gifts, visit our gifting blog.
3. How is inheritance tax calculated?
The standard rate for IHT is 40%, which is charged on the part of the estate that is above the £325,000 threshold (tax year 2021/2022).
For example, if an estate is worth £600,000, the tax will be charged at 40% of £275,000.
4. Can inheritance tax be avoided?
Inheritance tax is not required to be paid if either:
- The value of the estate is below £325,000(tax year 2021/2022).
- Anything over the £325,000 (tax year 2021/2022) threshold is left to your spouse, civil partner or an exempt party, such as a charity.
For anyone who gives their home to their children or grandchildren, the threshold for exemption on IHT can be increased to £500,000.
If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £1 million.
Reliefs and exemptions
Some gifts you give while you’re alive may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%.
Agricultural Relief may also apply if your estate includes a farm or woodland.
If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £1 million. (https://www.gov.uk/inheritance-tax)
For more advice on managing inheritance tax, get in touch or call 0121 285 8528.
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