Dealing with a bereavement is a difficult process. From funeral arrangements to finances, there is a lot to consider when someone has passed away. One thing that should not be overlooked is inheritance tax, and this quick guide tells you everything you need to know about it.
What is inheritance tax?
In a nutshell, inheritance tax is a tax charged on the estate of an individual that has died. An estate refers to any property, money and possessions that belonged to the deceased at the time of death.
How does it work?
The threshold for Inheritance Tax is £325,000.
- If the value of the estate is below £325,000 you would usually be exempt from Inheritance Tax.
- If you leave everything above £325,000 threshold to your spouse, civil partner, a charity or a community sports club, you would usually be exempt from Inheritance Tax.
- Your threshold can increase from £325,000 to £500,000 if you leave your home to your children or grandchildren.
Inheritance Tax rates
The standard rate for Inheritance Tax is 40%, and this is only charged on the portion of your estate that is over the £325,000.
Example: If your estate is worth £600,000 and you tax-free threshold is £325,000, then you would only be charged 40% tax on £275,000. The total amount of tax due would be £110,000.
How is it paid?
The person responsible for paying Inheritance Tax is the executor(s) of the estate if there is a will. The beneficiaries (those who inherit from the estate) are not responsible for paying any Inheritance Tax, however they may be responsible for other taxes based on what they inherit.
Example: If a beneficiary inherits a property and decides to rent the property to tenants, they would need to register as self-employed and pay income tax.
People who have been gifted a portion of the estate may have to pay Inheritance Tax. but only if:
- You give away more than £325,000
- You die within seven years
If you do gift away a portion of your estate before you die, you may be eligible for ‘taper relief’. This is where Inheritance Tax may be charged at less than 40% on the gift depending on when it was given.
Can I avoid Inheritance Tax?
The simple answer is no.
Inheritance Tax is payable within six months after the death of the estate owner. If there is tax due, those representing the estate will have to find the funds to pay the tax. Failure to pay the tax due will result in further charges and penalties.
If the funds are not readily available to pay the tax other options include:
- Applying for a loan
- Setting up an installment plan with HMRC
- Help from beneficiaries
At a time when finances are the last thing you want to think about, being prepared in the case of Inheritance Tax can make the bereavement process a little easier once it’s out of the way.
T K Williams-Nelson