Inheritance tax is the tax your heirs need to pay on the estate you leave behind, if said estate is worth more than £325,000 at the time of your passing. With property prices on the rise in the UK, it is likely that just your main residence will be over the threshold, so here are a few things you need to know in order to plan your estate.
Anything you own above the £325,000 threshold will be taxed at 40%. The threshold is apparently going to be frozen until 2017, but it may increase in the future, allowing you to pass on more of your estate tax free to your heirs. Your estate includes money you have in the bank, ISAs and savings accounts, your house and any rental properties, businesses you own, your vehicles, life insurance payouts, investments, etc. If you leave 10% or more of your estate to be given to charity, then the tax rate will be reduced to 36%.
On your will, you can name one or more executors to manage your estate after you die, they will be in charge of paying the inheritance tax, or an administrator will be appointed in case there is no will.
The will executor or administrator has six months after the person is dead to evaluate the worth of the estate and pay the corresponding tax.
As an heir, you do not normally pay tax, as the estate will have been taxed, but you may have to pay income tax on profits if the inheritance is in the form of dividend paying shares, or a rental property. You may also have to pay capital gains tax is you sell your shares or the property you inherited for a profit.
If some of the assets take time to sell, such as a property, you can pay the inheritance tax in instalments over 10 years. That may be helpful if you want to keep the property but the tax makes it hard on your budget to afford it right now.
If you are married when you die, your entire estate will be passed on to your spouse, and be exempt from inheritance tax. Your spouse’s allowance then doubles to £650,000 that they can leave tax-free. However, if you leave part of it straight to your children for example, your spouse’s allowance will only grow by the amount you left them tax-free. Say you leave £100,000 to your children, then your spouse will have a £325,000 + £225,000 = £550,000 allowance to leave without inheritance tax. You must be married or in a civil partnership in order to benefit from that transfer.
Anything you left to your heirs 7 years before you die will also be subject to inheritance tax, although you can give £3,000 tax-free each year.
Estate planning is really an area you should get advice on, in order to maximize the inheritance you leave behind, as well as not putting any unnecessary burden on your loved ones. Companies such as Francis Clark Tax Consultancy can help you plan your estate.