What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate of a deceased person. This includes all property, possessions, and money – based on its value at the time of death.
At this time, the government charges Inheritance Tax at 40% on the portion of an estate that exceeds the tax-free threshold, currently set at £325,000, known as the Nil-Rate Band (NRB).
For example: If the executor values the estate at £525,000, you would only pay tax on £200,000. This is the amount over the £325,000 threshold.
Exemptions and Reliefs
Exemptions can affect how much Inheritance Tax is actually payable:
- Spouses and Civil Partners: Assets passed to a spouse or civil partner are exempt from IHT.
- Charities and Political Parties: Any part of the estate left to registered charities or political parties is also exempt.
- Business and Agricultural Reliefs: Certain business assets or agricultural land may qualify for relief, potentially reducing the taxable amount.
Increased Thresholds and Transfers
- Residence Nil-Rate Band (RNRB): An additional threshold is available when you pass your home to direct descendants, such as children or grandchildren. This can raise the individual NRD to £500,000.
- Transferable Nil-Rate Band (TNRB): If one partner dies without using their entire NRB, the surviving spouse or civil partner can inherit the unused portion, potentially doubling the NRB to £650,000 for the couple.
Valuing the Estate
To determine if Inheritance Tax is due, the executor needs to:
- List all assets and determine their vale at the time of death.
- Deduct any debts and liabilities from this total.
Assets to consider include real-estate, savings, investments, and personal possessions. The executor will include any gifts made within seven years before death, as they may still incur IHT under specific conditions.
Payment and Responsibilities
The executor or the administrator of the estate will pay the Inheritance Tax, on behalf of the Beneficiaries. Subsequently, they will do this by the end of the sixth month after the person’s death.
They may also opt to pay the tax through the Direct Payment Scheme (DPS) using funds from the deceased’s bank accounts or by selling estate assets. Sometimes, an insurance policy is in place specifically to cover IHT.
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