We have been looking into Inheritance tax and when you have to pay it. Here is a basic and simplified version, but please go to http://www.hmrc.gov.uk/ for the full details:
Inheritance tax is basically a tax paid on somebodies estate when they die. It’s also sometimes payable on trusts or gifts made during someone’s lifetime. If an estate is valued at less than £325,000 then inheritance tax is not owed (2013-2014 threshold). The tax is payable at 40% on the amount over this threshold.
Married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies – to £650,000 (2013-14 threshold). Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die. Typically, the executor or personal representative pays Inheritance tax using funds from the deceased’s estate.
To find out if Inheritance Tax is due on an estate, you must first value the estate. This means adding up the value of all the assets in the estate – such as a house, possessions, money and investments – and deducting any debts the deceased may have owed, including household bills and funeral expenses. An estate also includes the deceased’s share of any jointly owned assets and the value of any assets held in trust. You should also review any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren’t exempt, include them in the overall value of the estate
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:
- Spouse or civil partner exemption. Your estate usually doesn’t owe Inheritance Tax on anything you leave to a spouse or civil partner who has their permanent home in the UK – nor on gifts you make to them in your lifetime – even if the amount is over the threshold.
- Charity exemption. Any gifts you make to a ‘qualifying’ charity – during your lifetime or in your will – will be exempt from Inheritance Tax. A donation to charity in your will may also reduce the rate that tax is paid at (see more in the link below).
- Potentially exempt transfers. If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.
- Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount – you can also use your unused allowance from the previous year but you use the current year’s allowance first.
- Small gift exemption. You can make small gifts of up to £250 to as many individuals as you like tax-free.
- Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.
- Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.
Thinking about typical house prices in and around the Watford area the £350,000 threshold doesn’t leave much for assets and savings.
If you pay income tax on your earnings throughout your lifetime and you pay stamp duty on buying your house, interest on savings etc, then it seems very unfair to then have to pay an additional 40% on what you have worked your whole life for and already paid tax on! So do you agree that this tax is firstly unfair and secondly in very poor taste at a time when families are grieving should they really have to go through their loved ones finances with a fine tooth comb asking people if they have received a gift from that person in the last 7 years? Or do you think it is a good tax that spreads the wealth taking for those who have money and putting it back into the Government pot to spend on the whole population?
We’d love to hear your thoughts on Inheritance tax, so tell us what you think below.