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What is Inheritance Tax?


What is Inheritance Tax?


Inheritance tax isn’t always payable; it depends on the value of an estate, as well as any assets held in trust or gifts given within seven years of a person’s death. In 2013-14, the inheritance tax threshold is £325,000.

What is It?

Inheritance tax is usually paid upon the death of a person, although it can be payable on gifts given throughout a lifetime. The majority of estates are worth less than the £325,000 threshold, so inheritance tax usually doesn’t need to be paid. In the event that inheritance tax is due, the rate is 40% for anything above the threshold, although this may be reduced to 36% if an estate qualifies owing to a charity donation.

Threshold Increase

Since 2007, married couples and those in civil partnerships can increase their inheritance tax threshold when their partner dies by as much as double, up to £650,000. An executor or legal professional simply needs to transfer any part of the inheritance tax threshold that hasn’t been used over to the living partner.

If the deceased partner had inherited £100,000, for example, then the transferable amount would be £225,000.

Who Pays It?

Inheritance tax is usually paid by the executors of an estate before any monies or assets are distributed; this is useful as it can avoid confusion and prevent people from potentially filling in a tax return unnecessarily.

If any monies or assets are transferred into trust, then the trustees are responsible for paying inheritance tax.

Inheritance Tax Exemptions

The following are examples of when inheritance tax isn’t payable:

  • If you leave anything to a spouse or civil partner.

  • If you leave gifts to a charity. Monetary donations will be liable for inheritance tax at the reduced 36% rate.

  • If you give a gift and live for seven years following this.

  • An annual gift exemption of £3,000 applies.

Inheritance Tax Deadlines

Usually, inheritance tax must be paid within six months of the end of the month when a person died. If inheritance tax hasn’t been paid in this time, then any outstanding amount owed is subject to interest.

It is possible to pay inheritance over a period of ten years, in regular instalments, if capital is tied up in an asset such as property.