What is Inheritance Tax and Who Pays?
Inheritance Tax
“In this world nothing can be said to be certain except death and taxes”– Benjamin Franklin. Although, what is not certain to some is what Inheritance Tax actually is, whether they need to pay it and who pays it?
What is Inheritance Tax?
Inheritance Tax is the tax that may be payable on someone’s death if the value of their estate (property, cash, shares, personal effects etc.) is above the Inheritance Tax threshold. For a single person, the threshold is currently £325,000. Tax is payable at 40% on sums over and above this amount. There are additional allowances available for married couples or couples in a civil partnership, where an individual owns a property which will pass to their lineal descendants i.e. children and grandchildren; or where an individual owns business or agricultural assets.
Naturally, there are also factors that can serve to reduce the thresholds available upon someone’s death such as lifetime gifting or giving away an asset whilst retaining some of the benefit. For example, putting a house that you are still living in rent free in your children’s names.
Who needs to pay it?
Inheritance Tax is paid on the death of someone whose estate exceeds the Inheritance Tax threshold. It is paid by the Executors of their Will (if there is one) or by the Administrators of their estate (if there is no Will).
Where does it get paid to and when?
Inheritance Tax is paid to HM Revenue and Customs. It must be paid by the end of the sixth month following the person’s death. Where the deceased owned a property and the cash is tied up in the property, it may be possible to pay the Inheritance Tax in instalments until the cash can be released. It is important to get advice if considering this option as there are deadlines that must be met and interest that needs to be considered.
Can I reduce my liability to Inheritance Tax?
Yes. If you have a taxable estate then you can do certain things during your lifetime to reduce the amount of Inheritance Tax payable on your death. The first thing that you should consider is seeking appropriate legal and financial ‘Estate Planning’ advice. Your Solicitor and Financial Advisor will be able to analyse your estate in detail and make personalised recommendations as to how to manage your liability to Inheritance Tax. Your Solicitor will also be able to advise you in relation to the preparation of your Will. This is particularly important so that you can decide to whom your estate should pass and who should be in charge of dealing with your affairs upon your death.
Life Time Gifting
It is also possible to reduce your liability to Inheritance Tax by making the most of the gifting rules/allowances available to you during your lifetime.
You can make gifts using your Annual Allowance which is £3,000 every tax year.
If you choose to make a gift larger than £3,000; then as long as you survive for a period of 7 years following the date that the gift was made, the amount will be disregarded and will not be brought back into your estate for tax purposes on your death. However, if you die within the 7 years then some or all of that gift may be taken into account when calculating Inheritance Tax.
You can also make any number of small gifts up to £250 to different people, gifts out of normal expenditure and gifts in consideration of a child or grandchild’s wedding. You should consider seeking advice before making any substantial gifts as there may be other considerations that need to be factored in.
If you would like further information, please contact Charlotte Day on 01530 564 498 or c.day@timms-law.com