If someone leaves a net estate worth more than £325,000, then Inheritance Tax (“IHT”) will need to be calculated and paid. The full rate of IHT is 40% on the value of your estate above the amount of any exemptions.
This is not always a straightforward process and the estate executor or administrator will need to carry out investigations and arrange for professional valuations of any assets worth £1,500 or more.
Valuing an estate for Inheritance Tax purposes
One of the first tasks is to identify all of the assets and liabilities within the estate. This may include one or more properties as well as savings, life insurance policies, pensions, shares, valuable items and any outstanding mortgages, loans or other liabilities. Professional valuations should be obtained, to include valuation of any property the deceased held, which should be carried out by a qualified surveyor (RICS).
The executor or administrator will also need to look at any gifts that the deceased made within the last seven years of their life, as these may attract IHT. While it is permitted to give away up to £3,000 per year as well as individual gifts of £250, larger gifts will have to be included in the IHT calculation.
The amount of IHT payable on gifts depends on the date on which they were made, with tax due on a sliding scale as follows:
Years between gift and death Rate of tax on the gift
- 3 to 4 years 32%
- 4 to 5 years 24%
- 5 to 6 years 16%
- 6 to 7 years 8%
- 7 or more 0%
The reduction in tax payable shown above is due to what’s known as “taper relief”.
Debts and expenses
The estate’s debts and expenses such as funeral costs and the cost of valuations, winding up the estate and estate agent’s fees can be deducted from the gross amount of the estate’s assets, giving a net figure.
Calculating Inheritance Tax
IHT is payable on the part of a net estate that is above the threshold of £325,000. It is generally charged at 40%, although if you leave 10% or more of your net estate to charity, the rate is reduced to 36%.
If the deceased was married, they can leave all of their estate to their spouse free of IHT. When their spouse dies, the executor can utilise the unused allowance of the first spouse of £325,000, meaning the estate of the second to die could potentially have an allowance of £650,000. In this event, IHT is only payable on the part of the estate above £650,000.
There is a further allowance of £175,000 if the deceased leaves a property to their direct descendants, i.e. children, grandchildren etc. This allowance can also be passed to a spouse if it has not been used, meaning a couple could potentially leave an estate of up to £1 million without needing to pay Inheritance Tax.
Paying Inheritance Tax
IHT should be paid within six months of the end of the month in which the deceased died. Money may have to be released from bank accounts and savings to do this, or it could potentially be paid in instalments over ten years, along with interest.
IHT calculations can be complex and it is generally advisable to seek professional help to ensure the liability is correctly calculated and fully discharged.
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