Inheritance Tax Explained

Inheritance tax is a subject that may not be pleasant to discuss and, like most taxes, can be unpopular. However, a proactive approach to inheritance tax and an awareness of the subject could help loved ones and beneficiaries save thousands of pounds when the time comes.

Here we discuss in more detail what inheritance tax means and the important facts you need to know. We also discuss any exemptions and reliefs that can lead to a reduction in Inheritance Tax liability.

What is Inheritance Tax?

Inheritance tax (IHT) is due on any assets (property, money and possessions) that are left to beneficiaries’ post-bereavement and is calculated based on the monetary value of assets minus any outstanding debt the deceased may have accrued. IHT is also applicable to some lifetime gifts, which we discuss in more detail later in this article.

Inheritance tax is currently only charged on estates that are worth in excess of £325,000 at a rate of 40%. However, this rate can decrease to 36% if 10% or more of the estate is left to a registered charity.

There is currently an additional allowance of £150,000 in place with regard to a main residence. This is due to increase to £175,000 in 2020/2021. This allowance is tapered away for gross estates in excess of £2 million and is only available if the residence is left to certain family members.

Who pays Inheritance Tax?

Once the estate of the deceased has been valued, the IHT is calculated and paid before the balance is distributed to the beneficiaries. However, if the deceased has made gifts during his/her lifetime, these may come back into charge to IHT. The tax may have to be paid directly by the recipient.

The IHT should be paid within six months of the death however there are exceptions for assets that take longer to sell. In these circumstances, IHT can be paid over 10 years, but this will be subject to interest.

It is vital to have a valid will in place to ensure that your assets are passed on in accordance with your wishes.

Are there any exemptions?

There are several ways to reduce IHT exposure and stay within the remits of the law. Here are some exemptions which can lower the final bill substantially:

• Any amount left to a husband, wife or civil partner- provided they reside in the UK.
• Any gifts given to registered charities or certain political parties.
• Any gifts made to universities, museums and some community sports clubs.
• Small gifts of less than £250 to an individual.
• Gifts given seven years prior to death occurring.
• Gifts made for a wedding or civil partnership (There are limitations to this exception, however- a maximum of £5,000 can be paid to a child, £2,500 to a grandchild or great-grandchild and £1,000 to any other individual).
• The value of certain trading and agricultural businesses or commercial properties (if occupied by a qualifying business).
The value of these exemptions will be excluded from the estate total value. Once this has been deducted, the remaining sum will be the final amount that is subject to IHT. If the balance is less than £325,000 no IHT will be payable at all.

How does Inheritance Tax work for gifts?

As you can see from the list above, gifting is one way to reduce exposure to IHT. However, IHT can still be applicable as gifted assets are included in the benefactor’s estate for up to seven years.

If an asset is gifted less than seven years before death occurs, the recipient will still be liable to pay IHT. There is a seven-year taper relief rule which means the percentage of IHT that is due depends on at what point during those seven years the gift was made. Here is the breakdown:

• 0-3 years- 100% of Inheritance tax will be due
• 3-4 years- 80% of Inheritance tax will be due
• 5-6 years- 40% of Inheritance tax will be due
• 6-7 years- 20% of Inheritance tax will be due

What’s next?
Inheritance tax can seem like a daunting prospect, especially if you have no idea how much your estate is currently worth or are not sure of what options are best suited to you, however the team at Wright Vigar are here to help. If you are worried about how much inheritance tax will have to be paid, or have any questions, then we can discuss the options available to you. Give us a call on 0845 880 5678 or email us on website@wrightvigar.co.uk.