What is Inheritance Tax?
Inheritance Tax is usually paid on an estate when somebody dies. It is payable if your estate, together with Trust assets from which you are entitled to the income, and gifts made by you within 7 years of death is valued at over the current Inheritance Tax threshold (£325,000 in 2011/12). Tax is payable at 40% on the amount of the net estate over this threshold. In the budget 2011, the Chancellor froze the threshold at £325,000 until 2015.
What is the increased threshold?
Married couples and registered civil partners can effectively increase the threshold on their estate when the second of them dies – to a maximum of £650,000 in 2011/12. Their personal representatives must claim the unused Inheritance Tax threshold or “nil rate band” of the first spouse or civil partner so that it is available to set against the estate of the second spouse or civil partner.
Who is responsible for paying Inheritance Tax?
Inheritance Tax is payable by different people in different circumstances. Usually, personal representatives pay it using funds from the estate of the deceased. Trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a Trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax – but this is not common.
How do I find out if Inheritance Tax is payable?
To find out if Inheritance Tax is due on an estate, you must first value the estate. i.e. calculate the value of all assets owned at the date of death – including any property, possessions, money and investments – and deduct any debts owed, including household bills and funeral expenses.
The estate also includes the deceased’s share of any jointly owned assets and the value of any assets held in a trust from which they were entitled to income.
Any gifts that the deceased may have made in their lifetime should be reviewed to see if they are exempt and, if not, they must be included in the overall value of the estate.
What exemptions and reliefs are there?
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Exemptions and reliefs include:-
When does Inheritance Tax have to be paid?
In most cases Inheritance Tax must be paid within 6 months of the end of the month in which the deceased died, after which time interest will be charged on the amount outstanding. Inheritance Tax payable on certain assets including land and property may be paid in annual instalments over 10 years.
When should I take advice on Inheritance Tax planning?
If you wish to consider reducing your Inheritance Tax liability we recommend that you take professional advice and ensure that your Will is up to date. The sooner you plan to do something about your inheritance tax liability, the more effective your arrangements will be. Please contact us for further information.