Inheritance tax is a tax on the estate of someone who’s died, including property, possessions and money.
Depending on the value of your total estate, inheritance tax may be payable on any assets you leave to your family or friends when you die.
It’s important to understand the basics, which we have outlined below. Don’t forget that DMA Law is an expert in wills and probate law and can give you advice on getting your affairs and estate on order.
How much is inheritance tax?
If the value of your estate is more than the ‘nil rate’ band of £325,000, then the part of your estate that is over the threshold will be liable for tax at the rate of 40%.
That means that on an estate of £335,000, 40% tax would be due on the £10,000 over the threshold, therefore £4,000 would be due.
There is an exception to this: if you leave at least 10% of your estate to charity, this would reduce the tax rate to 36%.
How much is affected by inheritance tax?
If you want to give away your home to your children or grandchildren, then the threshold will increase to £450,000 and if you are married or in a civil partnership and your estate is worth less than the threshold you can add any ‘unused’ allowance to your partner’s threshold.
Due to property prices rising rapidly over the past few years, an extra allowance is given to prevent more people falling into the inheritance tax trap.
From April 2017, the amount that can be passed to your loved ones without having to pay inheritance tax was increased, which means that married couples and civil partners will be able to pass as much as £1m without being hit by a tax bill.
There is no inheritance tax to be paid:
- If the value of your estate is below the threshold of £325,000, although you will still need to report this to HMRC.
- If you leave everything to your spouse, civil partner or a charity.
Who pays inheritance tax?
The inheritance tax is usually paid by the executor of the will, if there isn’t a will it’s the administrator of the estate that will have to pay.
Inheritance tax can be usually paid from the funds in the estate, or from money raised by the sale of assets if the estate has no cash.
You can also leave money in your estate to pay for this tax or arrange for a life insurance policy to cover this bill. Once everything is paid the executor can distribute what remains of the estate to the heirs.
When do we have to pay?
Inheritance tax has to be paid within six months after the person’s death, if it isn’t paid within this six months the HMRC will start charging interest. Executers can pay the tax with different assets, such as property or by instalment over ten years.
It’s important to mention that if you want to pay by instalment the outstanding amount will still get charged interest. Also, if your asset is sold before the Inheritance Tax is paid, the executors must make sure that all instalments and interests are paid.
Lastly, if the executor is paying the inheritance tax from their own account, they can claim back from the estate.
If you don’t want your family to have to deal with this, it’s very important to make a will. Remember, if you die without a will the law decides who gets what and a will could make this process much easier for your family.
Here at DMA Law we understand the problems that come with the advancing years and planning a will. Our life planning team can help you plan the future and can also help you understand and even reduce the impact of inheritance tax on your estate.
Please get in touch by using the contact form or by telephoning your local branch.