An Overview Of Inheritance Tax
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. There’s normally no Inheritance Tax to pay if either:
- the value of your estate is below the £325,000 threshold
- you leave everything to your spouse or civil partner, a charity or a community amateur sports club
If the estate’s value is below the threshold you’ll still need to report it to HMRC.
If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £450,000.
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 £900,000.
Inheritance Tax rates
The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.
Example Your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the to charity in your will.
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 is less than 40%. Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.
Who pays the tax to HMRC
Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person (called the ‘executor’, if there’s a will). Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.
People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.
Valuing the estate of someone who’s died
What you need to do:
As part of applying for probate, you need to value the money, property and possessions (‘estate’) of the person who’s died. You don’t need probate for all estates. Check if you need it. You need to complete 3 main tasks when you value the estate.
- Contact organisations such as banks or utility providers about the person’s assets and debts.
- Estimate the estate’s value. This will affect how you report the value to HMRC, and the deadlines for reporting and paying any Inheritance Tax. Most estates aren’t taxed.
- Report the value to HM Revenue and Customs (HMRC).
How long it takes:
The process of valuing the estate can take 6 to 9 months, or longer for big or complicated estates (for example if they involve trusts or there’s tax to pay). You don’t need to value the estate straight away after someone dies. There are only deadlines if the estate owes Inheritance Tax.
If it does, you’ll need to:
- send Inheritance Tax forms within one year
- start paying tax by the end of the sixth month after the person died – you can make a payment before you finish valuing the estate
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