Put simply; inheritance tax is due on the estate of someone who has died which HMRC will have a prior claim to before any of the deceased’s assets can be passed on. The rules surrounding inheritance tax can be quite complex and that means expert advice can prove to be invaluable.
Professional inheritance tax advice offered by experts in their field won’t simply make sure that you comply with the law, thereby avoiding unwanted tax investigations down the line, but can help to lower your overall tax bill thanks to a sound understanding of the whole tax system. That said, it is well worth getting to grips with the basics of inheritance tax, whether you want to leave your estate in good order for your loved-ones or because you think that you may come into an inheritance in the near future. Read on to find out more about the essentials of inheritance taxation in the UK today.
What Is an Estate?
You don’t have to have a huge country house with acres of land surrounding it to be someone who has an estate. In fact, for the purposes of inheritance tax, an estate means not just the property portfolio you own but all of your physical assets, too.
Added to that will be all of your liquid assets. So, your estate really comes down to all of your possessions, your money – including financial products held in your name – plus your real estate. Therefore, to work out whether those left behind will need to pay inheritance tax on your estate, you really need to come up with a valuation for everything you own.
How Much Is Inheritance Tax?
The amount of inheritance tax you need to pay varies. Chancellors of the exchequer have the right to change it. As of the financial year 2019-20, it is set at 40 per cent. However, as with many things related to UK tax, it is not as simple as that.
Firstly, inheritance tax is only due on estates that are above a current threshold. Today, this stands at £325,000. In other words, if your estate totals that sum or lower, then no inheritance tax will be due. On the other hand for every pound your estate is worth over £325,000 40 pence will need to be handed over to the taxman before you can pass it on.
Are There Ways Around Paying Inheritance Tax?
You must declare a death to HMRC so that the inheritance tax due can be calculated. If you don’t pay it, then there are some severe legal penalties you can expect to follow. However, there are a number of perfectly legitimate ways to avoid paying 40 per cent inheritance tax above the threshold.
Firstly, under the current rules, you are allowed to leave everything you own – above the taxable limit – to your partner. This is allowed for both civil partners and married couples. In addition, the sum that you might be taxed on can be left to a charity or a registered sport club, so long as it is not a professional one. This way, the value of your estate can be brought down to beneath the aforementioned threshold.
Another important thing to know is that there are special rules that apply to an estate that will be left to children or grandchildren. If you choose to leave your home to them, then the inheritance tax threshold rises to £475,000. Importantly, this rule applies to adopted children, foster children and step-children. Furthermore, if your spouse were to die before you – and his or her estate were to fall under the £325,000 threshold – then the remaining non-taxable amount can be added to your threshold.
What About Gifts and Tax Relief?
There are a number of rules that HMRC allows for when it comes to making gifts that have an impact on inheritance tax. To begin with, if you leave a tenth of your estate, or more, to a charitable institution in your will, then the tax rate is lowered from 40 per cent to 36 per cent. This only applies to certain asset types, however, so taking advice on how you can benefit from this is well worth it if you are putting your financial affairs in order.
There are plenty of accounting firms in the UK who can help. Furthermore, specialist advice will be beneficial if part of your assets are in the agricultural or woodland sectors because certain reliefs apply in both cases, something that can be especially useful for farmers to know about.
For everyone else, passing on part of the value of your estate in the form of gifts can help them to reduce its value to something approaching, or even below, the £325,000 threshold. The good news is that you can make as many gifts to your spouse or civil partner as you like.
Special rules also apply on making gifts to your children, grandchildren and great-grandchildren. Indeed, you can make up to £3,000 of gifts per annum without them counting as a taxable part of your estate. However, inheritance tax may be due on gifts that are made just prior to your death. This is designed to prevent the avoidance of inheritance tax by someone simply signing over their whole estate on their deathbed to somebody else.
Again, it is worth seeking guidance from someone knowledgeable in the tax system to help you make the most of the potential offered by non-taxable gifts. However, at its simplest, you can make gifts as large as you like without worrying about tax needing to be paid on them when you die, so long as that does not occur within the next seven years.
Gifts that are made within three years of your death are subject to inheritance tax at the usual rate, however. In between three and seven years, there is a sliding scale of how much tax will be due, known as a taper rate. It all gets quite complicated, especially if part of your estate is held overseas or your gifts have been made to people living in other tax territories who may, or may not, also reside in the UK from time to time.
Consult professionals, such as Salient who are an accounting firm in Essex, if you have given away part of your estate in recent years so that the right inheritance tax payment can be made.
Interesting related article: “What is Tax?”