Put simply, inheritance tax is the amount of tax payable on the money or property your loved one leaves you when you die. Not all inheritance is taxed – it has to be a certain amount of money before tax is introduced, and most taxable inheritance is paid on an estate. Below is a quick guide to inheritance tax thresholds, who pays it and how and when it needs to be paid.
What are the Thresholds for Inheritance Tax?
A single person threshold is £325,000. This includes a person’s estates and any trusts or gifts given in a person’s life time. The amount you have will be taxed at 40% or 36% if the estate qualifies as making a charitable donation.
If you’re married or in a civil partnership you have the opportunity to increase your inheritance tax threshold to £650,000 by the time the second partner dies. As long as the executor transfers the first partner’s unused inheritance tax (which will therefore be at a ‘nil rate band’, i.e. not taxable) to the second partner when they die, then loved ones will receive increased inheritance.
Who and When?
Normally the executor of a Will will organise tax payments, taking the money out of the estate left in order to pay the tax. If you have been left a trust fund, the trustees are responsible for paying tax on this.
If you get a certain asset and want to start investing it, or making returns on it in some way, taxes may well apply. There are three types of taxes which could apply to inherited assets: income tax, capital gains tax and inheritance tax. Find out more here.
In most circumstances you have to pay inheritance tax within 6 months of your loved one dying or you will be start to be charged on outstanding money owed. If you are paying money on an estate you can set yearly payments over a decade to pay off the tax.
Different deadlines apply to tax on trusts.
Who is exempt?
There are certain situations in which you would be exempt from paying inheritance tax. As mentioned above, if you leave your estate to your spouse or civil partner then your inheritance will be exempt from tax.
For the moment, if you make a donation to charity throughout your life time and in your Will, it will not be taxed, although there has been recent furore over a potential change to tax exemption on charitable donations, so watch out for this one.
If you make a gift seven years before you pass away, the gift will be exempt from inheritance tax. This is why a lot of people try to get the money they would leave to their loved ones out as early as possible.
You can make a gift of up to £3000 a year which is exempt from inheritance tax. If you don’t use it one year, you can use your allowance from a previous year, but you have to use up the present year’s allowance first. This means over 2 years you can gift £6000 without being taxed.
Small gifts of up to £250 can be made to as many people as you want without tax, likewise a wedding or civil partnership gift will not be taxed up to a certain amount.
If you own a business, National Heritage property, farm or woodland you’ll also qualify for some tax relief.
Inheritance tax isn’t that difficult to understand, but it can add up to become a substantial amount. As illustrated, there are exemptions and reliefs on the tax and a lot of financial advisors and lawyers can give you advice on the best way to reduce tax owed.
For more information on wills and inheritance tax, please visit the SSB Solicitors website!
