What is Inheritance Tax?
Inheritance Tax is due when a person dies and leaves property or possessions behind.
It is applicable on the total value of their estate - that is the sum total of all their savings and investments combined with the current value of their property and possessions.
The first £325,000 of any estate is exempt from Inheritance Tax. This is called the 'nil rate band' and means that most people pay little or no Inheritance Tax when they die.
How much is Inheritance Tax?
While Inheritance Tax is not payable on the first £325,000 of an estate; above this threshold the Inheritance Tax rate is set at 40%.
Inheritance Tax is only applied to anything above the £325,000 threshold, not on the estate's full value.
This means that if you inherit a total estate worth £425,000 Inheritance Tax will only be applied to £100,000 (as opposed to the full amount). Consequently you would need to pay £40,000 of Inheritance Tax.
There will be a new Inheritance Tax allowance for you main residence, in addition to the standard £325k, and will be:
Up to £100,000 in 2017-18
Up to £125,000 in 2018-19
Up to £150,000 in 2019-20
Up to £175,000 in 2020-21
Are there any exemptions?
As well as the first £325,000 of an estate being exempt from Inheritance Tax, there are a series of other exemptions that can protect an estate from Inheritance Tax.
These include, but are not limited:
Anything left to a husband, wife or civil partner as long as they reside in the UK
Gifts to registered charities
Gifts the deceased made over 7 years before their death
Small gifts of up to £250
Wedding or civil partnership gifts
The value of any farms, businesses or commercial properties
The value of these exemptions are excluded from the final value of the estate. For example, if an estate is worth £375,000 but gifts of £50,000 are left to charity then no Inheritance Tax would be payable at all.
Similarly, a person can leave their entire estate to their spouse and they would not need to pay any Inheritance Tax on their passing. The £325,000 Inheritance Tax exemption would be passed to the spouse meaning they able to leave up to £650,000 behind free from Inheritance Tax.
How can you work out how much an estate is worth?
If you are unsure how much your estate is worth then you will need to work out its total value, including all the different elements such as shares, property, investments and businesses.
You may also need to do this if you have recently inherited and are responsible for paying Inheritance Tax. Visit the GOV.UK website for more guidance on calculating the total value of an estate to see if Inheritance Tax is due.
Do you have to pay in a lump sum?
In most cases Inheritance Tax is paid as a lump sum directly from the value of the deceased estate.
In certain circumstances Inheritance Tax can be paid in instalments, usually where an asset included in the estate, such as a property or shares will need to be sold.
Find out how to pay an Inheritance Tax bill on the GOV.UK website.
How can I avoid Inheritance Tax?
If you are worried about how much Inheritance Tax will be taken from your estate after you pass away then you should look at ways to reduce your liability.
There are several ways that you can legally reduce your Inheritance Tax liability so that your beneficiaries do not lose a big chunk of their inheritance to the tax man.
Taking advantage of the various exemptions outlined above is the best way to do this, although you may want to seek financial advice before making any decisions.