Inheritance Tax – an introduction
Inheritance Tax is usually collected by HMRC when a person dies.
The tax is calculated by the executors of the Will, according to the value of the specific estate and all estates above the value of £325,000 (known as the “nil rate band”) will fall liable.
For example, Mary is a lady of 86. She dies having made a Will and has a simple estate to pass on, owning a house with a probate valuation of £300,000 and £40,000 in her savings account. After all bills and funeral expenses have been paid, the executors of her Will are left with £330,000. Inheritance Tax will therefore apply to £5000 (the difference between £330,000 available and £325,000 nil rate band). At the standard rate of 40%, this means the executors will need to pay £2000 before distributing the rest of the assets.
In most cases, IHT planning and calculations tend to be much more complex than this, so it is always advised to use the services of an estate planner and probate practitioner who may be able to minimise any Inheritance Tax due.
If you want to prepare your Will, it is worth remembering that if you give more than 10% of your estate to charity as a legacy, the final Inheritance Tax due will be charged at 36%, rather than 40%. In this way, you can see that if Mary had decided to leave a charitable legacy, then HMRC would have taken £200 less from her estate.
It may be that you’re part of a married couple or have a civil partner. In this instance, when one of you dies, the other can inherit your half of the entire estate without paying any Inheritance Tax at all. What’s more, when the last remaining partner dies, providing you left everything to them, the nil rate band is doubled, so Inheritance Tax will only fall due if your joint estate is valued at over £650,000.
You may see then that it makes sense to try and reduce the value of your estate before you die. One way you can do this is by making monetary gifts in the form of “potentially exempt transfers”. This however, is only valid should you live for seven years after the gifts are made. Up to £3000 can be given away in each tax year.
Other types of gifts will help you to minimise Inheritance Tax liability, regardless of how long you live. These include charitable gifts, gifts to your partner and gifts of up to £250 to whomever you like.
Inheritance Tax must be paid within six months of the person’s death but in certain circumstances, you may be able to pay instalments over several months, with added interest.