If your estate is worth more than £325,000 (per person), when you die, tax will be taken out of anything which is above that threshold when it is passed onto your heirs. This tax is known as inheritance tax. Anything above this threshold is taxed at 40 per cent.
From April 2017, this tax-free threshold will gradually be raised to £500,000 per person by April 2020. For couples, this will combine and raise to £1m, by April 2020.
In addition to money in the bank, your estate includes property and businesses owned, investments, vehicles, and life insurance payouts.
You pay inheritance tax at a rate of 40 per cent, although if you leave at least 10 per cent of your estate to charity then there is the possibility that you may pay only 36 per cent instead. Anything left to charity will be exempt from inheritance tax.
Inheritance tax is paid by either the executor of the will, or by the estate’s administrator if there is no will, usually. Whoever pays the inheritance tax will use funds from the estate.
Normally, inheritance tax will be paid within six months of the person dying – after this time period, the estate must pay interest on top of the tax. Inheritance tax may be paid over 10 years in instalments, in order to account for items that take a long time to sell, such as property and shares.
Sometimes there are exemptions to inheritance tax. If you leave your entire estate to your wife, husband or civil partner, inheritance tax does not need paying.
Assets which are given away by the deceased as gifts, before their death, may not incur inheritance tax.
However, the original owner of these assets must live for at least seven years after giving the gift, or else the gift will count towards the total value of the estate.
Anything that has value, or when something loses value as it is transferred (such as selling your house to your child for less money than it is worth), is classed as being a gift.
In each tax year, £3,000 worth of gifts can be given away by the deceased without the estate needing to pay inheritance tax on them. This is known as the ‘annual exemption’.
Estate inheritance is concerned with making sure all your affairs are in order with regards to an estate being inherited.
There are many different factors to consider with regards to inheriting an estate, such as making sure there is a Will in place, which is up-to-date and correct, and ensuring any taxes that need paying are sorted out properly.
To reduce the amount of inheritance tax owed, you may be able to make use of allowable gifts and exemptions. You may also want to make use of Gifts, which are exempt from inheritance tax if the person who contributed the gift lives for seven years afterwards. There are also trusts which may be of benefit, and for all of these areas, an accountant could be very helpful.