How Much Inheritance Tax Will I Pay?
How much inheritance tax will I pay?
For many people, inheritance tax can be a burden. Having to pay a tax when one of your loved ones dies feels unfair but the same rules apply to everyone. In summary, it's a set amount you have to pay on the value of an estate over £325,000.
That means that if the deceased's estate is below £325,000, you won't have to pay any inheritance tax (IHT). Anything above that amount then you'll have to pay a tax of 40%.
If the value of the estate (cash + assets) is £600,000 then you would only be taxed on £275,000 (£600,000-£325,000). This £275,000 would then be subject to the 40% tax which would work out to be £110,000 (£275,000 * 0.4). This means that out of the original £600,000 total, you'd be left with £490,000.
This is a basic example and often there are things that can be done to reduce this amount which we'll go into further here.
Who pays the tax?
The funds from the estate are expected to be paid to the HM Revenue and Customs (HMRC) and this will be the responsibility of the executor of the will. If there is no will then this can become a lot more complicated but is usually settled upon by family members.
The beneficiaries of the will won't have to pay any tax on anything they inherit as this would have already have been settled by the executor.
What are the exemptions?
If you're married or in a civil partnership then your partner will be able to inherit your entire estate, regardless of its value, without paying any tax. Even better than this, if none of the IHT allowance has been used up then this is inherited by the partner, making their IHT threshold £650,000.
For example. If you're in a marriage and have a house worth £300,000 and other assets worth £200,000, if one partner dies then the other won't have to pay IHT if they are given all the assets. If the other partner dies then the beneficiaries wouldn't have to pay any tax as it would be below the combined £650,000 figure.
If you give away your assets as a gift before you die then inheritance tax may need to be paid by the person receiving the gift. This would only be the case if you give away more than £325,000 and you pass away within seven years of gifting the asset.
This rule is in place to prevent people from shedding assets just before death to avoid the tax. However, as you get closer to that seven-year threshold, the 40% decreases gradually and there are set rules in place for this.
- 0-3 years = 40%
- 3-4 years – 32%
- 4-5 years – 24%
- 5-6 years – 16%
- 6-7 years – 8%
- 7+ years – 0%
Due to this, it's worth considering putting your assets in a love one's name (such as your children) while you're still in good health. If you have a mortgage-free house, for example, you can sign this off into your child's name and after 7 years, it stops being relevant for IHT.
To ensure this, however, the occupant of the property would have to pay market-rate rent on the property as well as their share of the bills. This isn't the case if the new owners also live in the property.
There are a few other notable exemptions to inheritance tax.
- You can give away up to £3,000 each financial year without it being counted and this is known as your annual exemption
- Wedding or civil ceremony gifts up to £1,000 to anyone, £2,500 for a grandchild or great-grandchild and £5,000 for a child
- Regular gifts out of your income for occasions such as Christmas or birthdays that don't negatively affect your standard of living
- Helping with someone else's living costs such as care for the elderly or a dependent child
- Any gift given to a charity or a political party
- As many small gifts of up to £250 as you want to any person, as long as they are not a part of another type of exemption
What if I'm living abroad?
If you have a home abroad but also a home in the UK then you're going to be counted as domiciled in the UK and all of your estate will be included for inheritance tax purposes. If you have lived abroad for a while then any assets abroad may be exempt if you:
- Have lived abroad for more than 15 out of the last 20 years
- Haven't owned a property within the last 3 years in the UK
An exemption to these rules is that if you are being charged inheritance tax by two or more countries. In this instance, you may be able to reclaim tax with any country that has a double-taxation treaty with the UK.
At its most basic level, you have to pay 40% on any amount you receive over £325,000. As we've seen here, it can become more complicated than that. If you have any doubts over how you can avoid paying so much inheritance tax then it's always going to be the best idea to contact a financial advisor.
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