Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of a person who has died. The tax is paid on the value of the estate above a certain threshold, which is currently £325,000. For married couples and civil partners, the threshold is doubled to £650,000. Inheritance tax is an important consideration for anyone planning their estate or receiving an inheritance, so it’s essential to understand how it works.
Who pays inheritance tax?
Inheritance Tax is usually paid by the executor or administrator of the deceased person’s estate. The executor is responsible for applying for a Grant of Probate, which is the legal document that gives them the authority to manage the estate and distribute assets to beneficiaries. In some cases, the person who inherits the estate may be responsible for paying the inheritance tax.
How much is inheritance tax?
Inheritance Tax is currently charged at a rate of 40% on the value of the estate above the threshold. For example, if the estate is worth £500,000 and the threshold is £325,000, the inheritance tax bill would be 40% of the difference, which is £70,000. It’s important to note that inheritance tax is payable on the total value of the estate, not just the amount that exceeds the threshold.
How can I reduce my inheritance tax bill?
There are several ways to reduce your inheritance tax bill, including:
- Making a gift – You can give away up to £3,000 each tax year without it being counted as part of your estate. This is known as the annual exemption. You can also make small gifts of up to £250 to as many people as you like each tax year without it being counted towards your annual exemption. Gifts to charities, political parties, and some other organizations are also exempt from inheritance tax.
- Setting up a trust – A trust is a legal arrangement that allows you to give assets away while still retaining some control over them. Assets held in a trust are usually exempt from inheritance tax, but there may be other tax implications to consider.
- Investing in business property – Some types of business property are exempt from inheritance tax, such as shares in unquoted trading companies and land, buildings, and machinery used in a business that is at least 50% owned by the deceased person.
- Taking out life insurance – You can take out a life insurance policy that pays out a lump sum on your death, which can be used to pay your inheritance tax bill.
It’s important to note that these options may not be suitable for everyone and should be considered carefully with the help of a professional adviser.
What happens if I don’t pay inheritance tax?
If the inheritance tax is not paid on time, HM Revenue and Customs (HMRC) will charge interest on the amount owed. In some cases, HMRC may also take legal action to recover the debt. It’s important to make sure that the inheritance tax is paid on time to avoid any additional charges or penalties.
Finally, Inheritance Tax is an important consideration for anyone planning their estate or receiving an inheritance in the UK. By understanding the rules and taking steps to reduce your tax bill, you can ensure that your loved ones receive the maximum benefit from your estate. However, it’s important to seek professional advice to ensure that you are taking the right steps for your individual circumstances.