June 19, 2024
What You Need to Know About Inheritance Tax

What You Need to Know About Inheritance Tax

Inheritance tax, or IHT, is the tax on the assets or money that a person leaves behind when they pass away as well as on the gifts that they make in the last years before they die. A number of these possessions can be passed on tax-free, the ‘nil rate band’ or ‘tax free allowance’. If an individual passes their possessions to their spouse or civil partner, then there’s no inheritance payable. However, almost all the same HMRC forms needed when IHT is payable need to be filed, it is only that no tax has to be paid. For this tax year, the tax-free inheritance allowance is £325,000, but the chances for it to be increased for several years are minimal.

As an addition to the nil rate band is the residence allowance and this applies when the deceased leaves their interest on a property that has been their primary residence at some point in their life, but doesn’t have to be at the time of death, to direct descendants, including children, adopted kids, foster children, stepchildren and even grandchildren. The residence nil rate band is the lower of:

  • The maximum nil rate band
  • The net value of the interest in the property

The maximum nil rate band begins at £100,000 per individual and increases by £25,000 for every year after April 2017, up to £175,000 by 2020 or 2021. It is important to appoint an executor as the role of the executor involves explaining the process to you and to ensure you are aware of all the costs associated with IHT.

The IHT Tax Thresholds & Rates

If you’re not in a civil partnership or not married:

If you’re single and pass away with assets worth more than £325,000 including property, investments and money, but after deducting expenses and debts, inheritance tax at 40 percent is payable on the value of the assets as long it is above £325,000.

If you are in a civil partnership or married:

Civil partners and married couples are allowed to pass their assets or possessions to each other tax-free and the surviving person is allowed to utilise both tax-free allowances.

Making Gifts Before Death

Inheritance tax is ideally payable on gifts that the deceased made during their life, particularly if they made the gifts within 7 years before their death, in addition to those that are passed under their estate at death. There are rules as to whether the gifts are tax-free whenever they were made, taxable but they may or may not be due at the time they were made and tax-free due to the timing.

So, Who is Responsible For Paying the IHT?

The inheritance tax payable on estate when an individual passes away is often paid from the estate. The estate consists of everything that the deceased owned, minus expenses like funeral expenses and debts like mortgages. Individuals who received gifts from the deceased may have to pay inheritance tax, but only if the deceased died within seven years and gave more than £325,000. If they refuse or are unable to pay, then the amount is deducted from the estate.

Planning For Death

Dying is not an aspect that most of us like to think about. However, putting a little thought into it can help spouses, friends and relatives handle the practicalities better during a saddening time.

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It’s particularly important to make these plans if you have people that rely on you. Whether you are a key employee, a business owner or have kids, making plans is essential. One of the most important parts of planning for your death is making a will.

This is especially important for unmarried couples, particularly if they have kids together or own property jointly. However, ensure that you have a competent lawyer when making a will and have copies for both parties and update it as you deem fit before passing on. Other steps that can be made to help those left behind include making online accounts and passwords available, getting life insurance as well as contingency planning for businesses.