An important part of estate planning is to consider and understand inheritance tax. In this article we look at why it is important to understand inheritance tax, as well as the rates, rules and potential exemptions.
Put simply, understanding inheritance tax gives you the best opportunity to mitigate your inheritance tax bill in your lifetime. As a result, you can maximize the amount that you leave behind for your loved ones. In addition, understanding inheritance tax can help you to avoid actions which may be in breach of the law in this area and to help you plan for the future.
Inheritance tax is the tax due on an estate of a person who has passed away; it is paid to HMRC. Inheritance tax is also paid on certain lifetime gifts but this article only focuses on inheritance tax on death.
Inheritance tax will generally be due on estates valued over £325,000 - however, there are some exemptions. Your estate may be exempt from inheritance tax if:
Even if your estate is valued at less than £325,000, your executor will still need to report the value of the estate to HMRC for inheritance tax purposes.
Inheritance tax will be paid out of your estate by the person responsible for dealing with your estate, known as your executor.
Inheritance tax is paid directly to HMRC and is due by the end of the sixth month after a person has passed away. If your executor fails to pay the amount due on time, there will be additional charges to pay. Where there are insufficient funds to pay the amount before the deadline, it is possible in certain circumstances to come to an agreement with HMRC to make payments over up to ten years. If agreed, the amount due will be split into annual payments and interest will be charged.
The basic threshold for an estate to qualify for inheritance tax is £325,000, however, if you give away your home to your children or grandchildren, your threshold may increase to £500,000. Also, if you are married or in a civil partnership, any unused threshold from the first death will be transferred to the surviving partner. For example, if your partner’s taxable estate was worth £200,000, this would leave a balance of £125,000 to be transferred to your estate. This would mean your threshold would increase to £450,000.
Inheritance tax is charged at 40% on everything over and above the £325,000 (or ehanced) threshold. However, there are a number of reliefs and exemptions.
Some of the most common reliefs are noted below, but you should discuss your specific circumstances with a solicitor who specialises in succession planning.
Allows some assets in relation to a trading business to be passed on without paying inheritance tax or paying a reduced rate
If you leave a certain percentage of your estate to charity, you could pay a reduced rate of inheritance tax overall. In addition, any part of your estate left to charity will be exempt from inheritance tax.
If your estate includes a farm or woodland, you may be eligible for inheritance tax relief.
Murray Beith Murray Partner, Andrew Paterson, is a specialist in estate planning and asset protection. If this blog has raised any questions or you would like to discuss ways in which your inheritance tax liability can be reduced, please get in touch using the enquiry form or call on 0131 225 1200.
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