Inheritance Tax

Inheritance tax (IHT) is a tax on the estate of someone who has passed away.

Inheritance Tax (IHT)

Inheritance tax is a tax that is levied on assets inherited from a deceased person. In most cases, inheritance is not considered income for taxation purposes. The inheritance tax is paid by the individual who inherits the assets.

Most of the time, only large estates are hit by taxes; chances are, you won't have to pay them. However, there are several exceptions, and the circumstances of your inheritance tax position can have a significant impact on your tax bill.

If either of the following applies, there is usually no Inheritance Tax to pay:

  • If your estate is worth less than £325,000. 
  • You can leave everything over £325,000 to your spouse, civil partner, a charity, or a community amateur sports club.

Lawrence Grant's experts have inheritance tax specialists to help you with determining and filing inheritance taxes.

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Working of Inheritance Tax

The standard inheritance tax rate is 40% on any property in your estate worth more than £325,000. For instance, if your estate is worth £500,000, your tax payment will be £70,000 (40 percent of £175,000, the difference between £500,000 and £325,000).

The transferable allowance for the 2021-22 tax year is £175,000.

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Who pays Inheritance Tax?

Inheritance tax is usually paid from your property if money or assets are passed on after you die. Your estate consists of everything you own, minus debts like your mortgage and bills like funeral costs. IHT must be paid by the end of the sixth month following the person's death. HMRC must first provide an inheritance tax reference number, which must be used for at least three weeks before a payment is required.

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What is the 7-year rule in the UK?

In most cases, however, if the tax is due on gifts you made during the last seven years before your death, the people who received the gifts are responsible for paying the tax. If they are unable or unwilling to pay, the sum owed is deducted from your estate.

Most gifts, with the exception of those given into most types of trusts, are not taxable by Inheritance tax when made, regardless of their value. Furthermore, if you live for 7 years after making those gifts, they will be exempt from Inheritance tax. Potentially exempt transfers are the name given to these types of gifts. The term "potentially" exempt comes from the fact that if you do not live for 7 years from the date of the gift, the gift will be subject to Inheritance tax.

When a transfer becomes taxable, the transfer's value is applied so that it affects your NRB and, consequently, the amount you can pass on to your beneficiaries tax-free when you die. If you die during the next seven years and your gift exceeds the NRB of £325,000, IHT will be charged the amount exceeding the NRB.

We understand that the rules and regulations of IHT might seem daunting but, our team at Lawrence Grant is fully equipped to help you out with any and all queries you may have. 

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Frequently Asked Questions

Do spouses pay Inheritance Tax?

In most circumstances, a couple can pass their property and assets to each other tax-free. The spouse gets permission to enjoy both tax-free amounts under the following condition: 

  • If the first partner to pass away did not use up their whole inheritance tax allowance by giving away a large sum of money in their will. 

Most married couples or civil partners can transfer up to £650,000, or £1 million. This depends on if your estate includes your home, which is tax-free in 2021-22. That will double the amount the surviving partner can leave behind without the need for tax preparation.

Who is in charge of handling the payment for Inheritance Tax?

The Executor/Administrator of your estate is the person in charge. It is critical to complete the required tax form and pay the correct amount of tax; otherwise, errors may result in fines and interest being imposed.

What amount will I have to pay in Inheritance Tax?

The amount of Inheritance Tax due is determined by the assets owned at the time of death and any gifts made during the lifetime. There are a lot of elements that go into deciding whether or not your estate will be subject to Inheritance Tax. For further information about this, please contact us.

When to pay the Inheritance Tax?

Inheritance Tax must be paid before the end of the sixth month following the death of the person. HMRC will begin charging interest if it is not paid by then. The executors have the option of paying the tax on certain assets, like property, over ten years in instalments. However, interest will be applied to the unpaid tax balance. If the asset is sold before all tax is paid, the executors must ensure that all payments (and interest) are settled.

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