The current threshold beyond which inheritance tax (IHT) is paid is £325,000. Most estates are valued under the threshold and there is no IHT to pay on them.
However, where the estate is worth more – and it does not pass directly to the deceased’s spouse or civil partner – the excess will be taxed at 40%. On an estate worth £360,000, for example, the IHT bill will be £14,000 (£360,000 – £325,000 = £35,000*40% =£14,000).
IHT spouse relief
Married couples and those in civil partnerships can share their allowances. As before, on death, one partner can leave as much money as they like to the surviving partner, or up to £325,000 to anyone else, without any tax being due.
Now, though, the second partner can use any remaining allowance on top of his or her own £325,000. This means when the second partner dies, he or she can leave up to £650,000 worth of assets without there being any tax to pay.
Valuing an estate
Your estate includes your home, your car, your bank accounts and investments and any assets you have given away in the seven years before your death. Some deductions are allowed – any bills that are outstanding at the time of death can be paid off and funeral expenses paid before the estate is valued for tax purposes. There are also reliefs, for example on unquoted shares and some types of property.
You can leave things to certain people and organisations without their having to pay IHT. Gifts to your husband, wife or civil partner are tax-free – this counts even if you are separated, but not divorced, and as long as you both live in the UK.
You can also leave money and assets to charities based in this country, to political parties and some institutions, for example museums and galleries.
If you are not married and have not gone through a civil partnership ceremony, gifts to a partner are not exempt.
Each year you can make a number of gifts to friends and family that will not be included in your estate, even if you die within seven years of making them.
You can give away up to £3,000 in each tax year, and carry over any unused allowance to the next year. On top of this you can make small gifts worth up to £250 each to as many people as you want each tax year – although you can’t combine a small gift with the annual exemption and give some people £3,250.
You can also make gifts to friends and relatives who get married or become civil partners. Each parent can give their child up to £5,000, grandparents and other relatives can give up to £2,500 and anyone else can give up to £1,000. These gifts can be combined with the annual exemption, so you could give away up to £8,000 to your child.
Gifts that are part of your normal expenditure, for example Christmas and birthday presents, are also exempt.
Potentially exempt transfers
These are gifts that will be added to your estate if you die within seven years of making them. They include any outright gifts to anyone, and payments into certain trusts.
These gifts cannot have strings attached. If you give your children your house but continue to live there, its value will still be included in your estate and will not be exempt.
Her Majesty’s Revenue and Customs (HMRC) has been cracking down on trusts to prevent their being used as a way of avoiding IHT. Payments into trusts for someone who is disabled, and certain trusts for children, are potentially exempt transfers.
Payments into other types of trust are subject to tax, whenever they are made.
Paying the bill
The value of your estate will be calculated by the Executor you have nominated in your Will, with the valuation based on the current market value of the assets. He or she will calculate the amount owed to HMRC.
If there is an IHT bill it must be paid within six months of the end of the month in which you died, otherwise the estate will be charged interest. However, tax on land and buildings can be paid in installments over 10 years, unless the asset is sold within that time, in which case the bill must be settled straight after the sale.
To ensure there is cash around to pay the bill, you may want to set up a life insurance policy, which will pay out when you die. Payments into a policy will be exempt from IHT. At City & Country Financial Services we will show you how to get your insurance policy paid within days of your death rather than waiting until probate is granted.