So today I wanted to write a quick blog that just outlines all the different aspects of Inheritance Tax since I know it is a big area many people are unsure of.
What is Inheritance Tax?
Well it’s quite a nasty tax which will be deducted from the total amount of anyones ‘estate’ when they pass away. In this purpose an ‘estate’ is not to be confused with construction such as a ‘housing estate’. In this case an ‘estate’ simply refers to the total amount of all assets which belonged to someone when they passed away. This includes anything and everything you can think of – from the value of a property right down to the value of furniture in a home. All these assets have to be added up and the total amount of everything is then the estate of the deceased person.
How to value an Estate
This is quite a large subject but in simple you must add up the value of everything that belonged to someone to calculate their estate. For small possessions such as computer, furniture etc, you just need to give an approximate price of everything added together as though you were going to sell those items now, so value them fairly and be sure to make a note of how you came to that figure.
It can become tricky when trying to work out the value of something which is jointly owned, such as a property that is owned by two people. If this is the case then you must calculate that person’s ‘share’ of that asset, so if the house is worth £300,000 and is owned by 2 people with an equal share then only £150,000 of that total is part of their estate.
You can also deduct amounts from someone’s estate such as any outstanding debts that this person had when they passed, funeral costs etc.
Please Note: Life Insurance Payouts generally aren’t added to a person’s estate since that amount is being paid to other people, but always check with the insurance provider if that’s the case.
How much is Inheritance Tax?
Inheritance Tax is quite simple, you have to pay 40% tax on everything over £325,000 in a person’s estate. If someones estate is under this amount then there’s no tax to pay. It’s as simple as that! Many people will think they would never have this much left when they pass, however it’s always worth thinking about how much ALL your assets come to since the value of everything added together may surprise you and it’s better to be aware of your estate’s worth.
Assets that aren’t taxable
There’s a thing known as the ‘7 Year Rule’ which means if the deceased person gave away anything as a ‘gift’ more than 7 years ago, then this doesn’t form part of their estate. However any ‘gifts’ that were given within 7 years will be taxed on the following:
Less than 3 Years – 40% Tax
3 to 4 Years – 32% Tax
4 to 5 Years – 24% Tax
5 to 6 Years – 16% Tax
6 to 7 Years – 8% Tax
How to pay Inheritance Tax
Usually the ‘Executor’ of the will pays the inheritance tax from the person’s estate, however if they don’t have a will then the responsibility falls to the ‘Administrator’ of the Estate.
The Executor or Administrator then has 6 months to pay the inheritance tax in full or they will start to gain interest on the amount. However if there’s a lot of assets to sort out such as having to sell houses etc then you can setup a system to pay instalments for up to a maximum of 10 years but the interest will continue to grow.