What is Inheritance Tax?

All you need to know about inheritance tax and how can avoid it

If your estate is worth more than £650,000 and you don’t wish to pay any inheritance taxes on it before passing it on to your spouse or civil partner, this guide can help you.

Inheritance tax is a fee you have to pay when someone dies and leaves their money or property. In the UK, it’s usually paid by the person who inherits the money or property, either as part of an arrangement with how they will be compensated for giving up their inheritance, to limit what they’ve inherited (i.e., if you inherit £100k but don’t want your income taxed heavily) – this is called an ‘inheritance exemption’. 

How much is Inheritance Tax?

The amount of tax payable can vary depending on many factors such as:

  • Whether it’s over £325000 from one source 
  • Amount left after deductions relating to costs like probate fees1 etc. are taken into account 
  • Whether you’re in the higher or lower tax bracket

How to avoid Inheritance Tax?

You can’t escape taxation altogether on your inheritance, but there are ways you might be able to lessen what’s payable. One option is if a spouse survives and inherits the money/property, and they don’t count as part of their spouse’s estate when they die.

The spouse would inherit the assets and not be liable for inheritance tax as it doesn’t form part of their estate.

If you’re self-employed, then setting up an appropriate trust could help reduce your liability to Inheritance Tax on any money left by a deceased parent or partner if applicable.

How to value the estate

The value of the residence is assessed by looking at a few factors, including:

  • The date on which you die – with an increase in inheritance tax payable for subsequent deaths.
  • The value of your estate – including any property, cash and investments.
  • Your existing liabilities, such as any mortgage or loans that need paying off from the proceeds of the sale of your assets.

Who pays Inheritance Tax?

The person who receives the inheritance pays Inheritance Tax. If you leave assets to your spouse in married couples, they will not pay tax on anything up to £325,000. However, if you would like them to inherit more than this amount, they may pay a higher tax rate.

When do you have to pay Inheritance Tax?

You don’t have to pay Inheritance tax if you die on or after your 75th birthday. If you are under 75, then inheritance tax is payable when someone dies, and their estate has a value over £325,000.

Inheritance Tax gifts, reliefs and exemptions

There are exemptions to Inheritance tax for some types of asset. For example, suppose you leave your property or business to a direct descendent (child or grandchild). In that case, there is no inheritance tax payable on the value of that estate until they die and pass it onto their children.

Couples in a civil partnership don’t have to pay inheritance tax as they are not recognised as spouses.

What happens when someone dies?

When someone dies, all assets in their name become part of their estate, which may include shares, stocks, savings bonds2, cars and bank accounts, and any real-estate properties owned by them like houses or flats. If the person leaves debts such as mortgages unpaid, then these will form part of the estate. The executor can pay off any outstanding mortgage before selling your home under certain circumstances, but the executor is not responsible for any other debts.

Some insurance policies can help protect you; for example, life insurance policies are a method of providing for one’s family in the event of death. They have become increasingly popular as people fear that they may not be able to provide enough income during their lifetime and want to avoid burdening their families with debt when they pass away.

Inheritance tax allowance and inheritance tax threshold

Inheritance tax allowance is set at £325,000 for couples.

If both people in a couple die and you inherit from each person, any amount over the allowance is subject to Inheritance Tax. This rule doesn’t apply if one of the partners dies before they reach age seven years old or a period longer than two years after their partner’s death (known as “nil-rate band”).

If there’s no will, the rules are different. If a partner died before 24th March 2011, inheritance tax is calculated on any property and other assets that they left to their spouse or civil partner after deducting an allowance for each person of £325,000. Any amount over this limit would be subject to Inheritance Tax.

If a partner died after 24th March 2011, inheritance tax is calculated on any property and other assets that they left to their spouse or civil partner minus an allowance for each person of £650,000. Anything over this limit would be subject to Inheritance Tax.

The inheritance tax threshold is £325,000 for individuals and £650,000 for couples.

This means that a spouse or civil partner will be able to inherit assets worth up to £650,000 before they pay any inheritance tax. This is the case even if this person has children from another relationship who could also benefit from their parent’s estate.

Please note that Inheritance Tax will be charged on all assets that exceed the threshold.

Common Questions

What is the inheritance tax rate 2021?
How much can you inherit from your parents without paying taxes?
Do you have to pay inheritance tax before probate?
What happens when you inherit money?

In Conclusion

Inheritance tax is charged on the money you inherit from a family member after death. You can avoid paying inheritance tax by giving away your money before you die or donating it to charity.

Seeking professional advice from a financial adviser can give you the proper guidance.

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