Introduction
Inheritance tax (IHT) is a tax that is paid on an individual's estate after they pass away. It is a tax that is payable by the executor of the estate, and it is calculated on the value of the estate at the date of death.
In this guide, we will provide comprehensive guidance on IHT, including who needs to pay it, how to calculate it, and how to reduce it.
Section 1: Who Needs to Pay Inheritance Tax
- The executor of the estate is responsible for paying IHT
- IHT is only paid on estates that are above the IHT threshold (currently £325,000)
- If the estate is below the threshold, no IHT is payable
- If the estate is above the threshold, IHT is payable at a rate of 40% on the value above the threshold
- There are some exceptions and reliefs available to reduce the amount of IHT payable
Section 2: How to Calculate Inheritance Tax
- The value of the estate is calculated by adding up all the assets (property, investments, personal possessions) and deducting any liabilities (mortgages, loans, debts)
- The value of any gifts made by the deceased within seven years of their death is also added to the estate value
- The IHT threshold is currently £325,000, and any value above this is taxed at a rate of 40%
- There are some exemptions and reliefs available to reduce the amount of IHT payable
Section 3: Exemptions and Reliefs to Reduce Inheritance Tax
- Spouse or civil partner exemption - If the deceased leaves their estate to their spouse or civil partner, there is no IHT payable
- Nil-rate band - Each individual has a nil-rate band of £325,000, which means that the first £325,000 of their estate is tax-free
- Residence nil-rate band - If the deceased leaves their main residence to their direct descendants, there is an additional tax-free allowance of up to £175,000
- Annual exemption - Each individual can give away gifts of up to £3,000 per tax year without it being included in their estate for IHT purposes
- Small gifts exemption - Each individual can make gifts of up to £250 per recipient per tax year without it being included in their estate for IHT purposes
- Business property relief - If the deceased owned a business, there may be relief available to reduce the IHT payable on its value
- Agricultural property relief - If the deceased owned agricultural land, there may be relief available to reduce the IHT payable on its value
Section 4: Planning to Reduce Inheritance Tax
- Lifetime gifts - Gifts made more than seven years before death are not included in the estate for IHT purposes, so it may be beneficial to make gifts during a person's lifetime
- Trusts - Setting up a trust can be a way to reduce IHT liability by moving assets out of the estate
- Pension planning - If a person dies before the age of 75, their pension can be passed on tax-free to beneficiaries, so it may be beneficial to make pension contributions in later life
- Life insurance - Setting up a life insurance policy can provide a lump sum to pay for any IHT liability, so it may be beneficial to consider this as part of an overall estate planning strategy
Conclusion
Inheritance tax can be a complex and often confusing area, but with careful planning and understanding of the rules and exemptions available, it is possible to reduce the amount of IHT payable. By taking professional advice and considering all the options available, individuals can ensure that their estate is managed in the most tax-efficient way possible.