Will I be liable for Inheritance Tax on my Estate?

Inheritance Tax

What is meant by Inheritance Tax?

Inheritance Tax is normally paid on an estate when someone dies. Often it is payable on trusts or gifts made during someone’s lifetime also. It is often the case that estate’s don’t have to pay Inheritance Tax as they are valued less than the Inheritance Tax threshold.

What is the Inheritance Tax Threshold? 

Not every person has to pay inheritance tax. It only becomes due if your estate – including any assets held in trust and gifts made within seven years of death – is valued over the Inheritance Tax threshold which currently is £325,000 for 2009-2010.

The inheritance tax is payable at 40% on the amount over the threshold.

What is the case for married couples and civil partners? 

Since October 2007, married couples and registered civil partners can increase the threshold on their estate when the second partner dies. This can be increased to as much as £650,000 in 2009-2010. The personal representatives or executors must transfer the first spouse or civil partner’s unused Inheritance Tax threshold to the second spouse or civil partner when they die.

Who will have to pay the Inheritance Tax?

  • In most cases it is the executor of the estate or a personal representative who pays the Inheritance Tax using funds from the deceased estate.
  • If assets have been transferred into a trust then it is usually the trustees who will be responsible for paying the Inheritance Tax.
  • In some cases people who receive gifts or who inherit from the deceased have to pay Inheritance Tax but this is not a common scenario.

How do I know if I have to pay Inheritance Tax?

In order to understand whether you have to pay Inheritance Tax on an estate you will first be required to value the estate. You will be required to add up the value of all the assets in the estate deducting any debts that the deceased may have owed. The assets could be anything from possessions, money, investment or a house whereas debts include any household bills owing and the costs of the funeral.

If the deceased has made any gifts during their lifetime you should also evaluate them in order to see if they are exempt and include them in the overall calculations of the estate.

When valuing the estate what do I need to look for?

The following are assets that should be included when calculating the value of an estate:

  • Money in bank accounts or a building society
  • Houses and land
  • Businesses
  • Investments
  • Personal belongings – specifically jewellery and antiques etc
  • Cars
  • Assets in any trusts from which the deceased may have benefitted
  • Payouts from life insurance policies
  • Foreign assets which are held abroad including foreign bank accounts, property or shares

You must also look at any gifts given away by the deceased in the seven years before his or her death and whether they owned any property jointly with another person.

When calculating the total value of an estate to see if it comes above the Inheritance Tax threshold you must also look at the following and make the appropriate deductions:

  • Any mortgages that are still outstanding
  • Whether they have any outstanding credit card payments
  • Bank overdrafts
  • Unpaid personal taxes such as Income Tax
  • Any household bills remaining to be paid
  • The costs of the funeral

Are there any exemptions to the Inheritance Tax Threshold?

In certain cases even if the estate is calculated at being over the Inheritance Tax threshold assets can be passed on without Inheritance Tax having to be paid. The following are examples of when this will be the case:

  • Your estate does not usually have to pay any Inheritance Tax on anything that you leave to your spouse or civil partner who has their permanent home in the United Kingdom even if the amount is over the threshold. This is also the case in relation to gifts made during the lifetime.
  • Any gifts made during the lifetime or in a will to a registered charity will be exempt from paying any Inheritance Tax.
  • If for example the deceased owned a business, farm, woodland or National Heritage property some relief from Inheritance Tax is available.
  • You can give away up to £3,000 each year whether this be as a single gift or as several gifts which add up to that amount when totalled up. If you do not use your yearly allowance then you can use that the next year but you cannot use next year’s allowance first.
  • You can make small gifts of £250 to as many people as you wish and will not be required to pay any tax on these.
  • Gifts for people getting married or registering in a civil partnership are also exempt up to a specified amount 

When will I have to pay Inheritance Tax?

Most of the time Inheritance Tax will be required to be paid within six months of the end of the month in which the deceased died. After this time interest will be charged on the outstanding amount.

In cases where the value of the estate is tied up in assets such as a house then you can pay the Inheritance Tax in annual instalments over a period of ten years.