Inheritance Tax, also known as IHT, is levied against money and assets that you leave behind at death. It also applies to certain gifts you might make shortly prior. You do have the ability to pass a certain value of your assets to your heirs without worrying about the IHT. This is called the ‘tax-free allowance’ or the ‘nil rate band.’ Inheritance Tax doesn’t apply at all to assets you pass to your spouse or civil partner. Note that in these special circumstances, all of the same HMRC forms need to be filled out and filed. Your heirs need not pay any tax, but the details of the inheritance must be reported.
At present (for the current tax year), the tax-free allowance is set at £325,000.
“This figure is likely to remain stable for the foreseeable future,” comments Probate experts at Probaters.
Beyond the nil rate band, there is also a significant ‘residence allowance’ which protects a property if you used it as a main residence at some point. You need not be residing in the property at the time of your death for it to be protected. In order to qualify for the residence allowance, the property in question must be left to a ‘direct descendant.’ This category includes children, stepchildren, adopted children, foster children, and grandchildren. Protection for residences goes only as far as the lower of two limits: Either (1) the total net value of the deceased’s interest in the property or (2) the maximum nil rate band. This latter limit starts at £100,000 per person in April 2017. The limit increases by £25,000 per year up to a total limit of £175,000 by 2021.
Rates and Thresholds for the Inheritance Tax
Single (No Marriage or Civil Partnership)
If you are single and your estate is worth more than £325,000 at the time of your death, IHT applies to all value above that limit at a rate of 40%. Your estate, for these purposes, includes all property, money, and investments after the deduction of any outstanding debts and expenses (including funeral costs).
Married or in a Civil Partnership
Spouses and civil partners may leave possessions and assets to each other upon death without paying any inheritance tax. After October 2007, surviving partners are now allowed to combine any remaining tax-free allowance from their partner’s death with their own.
Gifts Made During Your Lifetime
IHT can potentially fall due on gifts you make prior to your death. Inheritance tax may be payable if you made the gift within the seven years preceding your death. Applicability of the tax will vary based on extensive regulations. These are the key factors:
- If the gifts were tax-free at the time they were made
- If the gifts were tax-free specifically because of their timing
- If tax was not due at the time of the gift but the gift itself is ruled taxable
The Inheritance Tax Bill: Who Pays?
The source of funds for meeting your IHT bill is generally your estate itself. Your estate consists of all the assets and money that you own, disregarding the money required to pay debts and meet post-mortem expenses such as your funeral.
Individuals to whom you made gifts may have to pay IHT on them. This only applies if you gave them within the last seven years of your life and the value of the gifts was greater than £325,000. If gift recipients are unwilling or unable to pay this tax, then the responsibility for it falls back upon your estate.
Planning For Death
Many people have a natural reluctance to think overmuch about their own deaths. Making the effort to set forth some basic plans can save spouses, relatives, and friends from a tremendous amount of stress after your death.
Planning for your death becomes more important if there are people relying on you. Examples include not only having children but also owning a business in whole or in part.
Making out a will is a crucial part of planning for your death. Wills are especially important for couples who are not married but own joint property or have children.
You can do more than you might think, right now, to make things easier on those left behind after your death. Business contingency plans, life insurance, and even small steps like records of your online accounts can all help the relatives and friends who will have to deal with your passing.