Inheritance Tax in the UK is paid within six months of inheriting property. This tax is levied on the assets you leave behind for your heirs or beneficiaries.
Assets for inheritance tax are calculated after deducting debts and liabilities. You’ll be able to calculate ad reduce inheritance tax after careful estate planning.
Pay Less Inheritance Tax in the UK
Here are 5 ways you can use to pay less inheritance tax in the UK –
Increase the Nil Rate Band Threshold
The nil rate band threshold is the amount below which you do not need to pay any tax.
The nil rate band threshold in the UK is set at £350,000. This means that if the assets at the time of death are below this amount, you do not need to pay inheritance tax on inherited assets.
You can raise this threshold further by adding the residence nil rate band, set at £175,000, by leaving the property to your civil partner/spouse.
In total, you can raise the nil rate band to £500,000, which raises the taxable threshold by quite a bit.
Give gifts away every year to save on inheritance tax. You can give up to £3,000 every year which is exempt from inheritance tax.
There is a 7-year Taper Relief slab to calculate the inheritance tax.
There are a lot of steps to calculating the inheritance tax. Inheritance tax can be calculated easily with the help of an inheritance tax planner.
Give Away Assets from Capital Gains
You may not have to pay inheritance tax if the inherited assets are below the nil rate band, However, there are some assets that attract capital gains tax at the time of selling.
For example – If you sell your inherited house at a profit, you’ll have to pay capital gains tax on the interest you get on it.
However, if the tax you need to pay is under your tax-free allowance, then you do not need to pay any capital gains tax.
Use Wills and Trusts, Both
Wills and trusts are the legal instruments used in estate planning. Effectively planning your estate means you minimize the amount of inheritance tax you pay.
Wills record the
- individual’s assets,
- debts and liabilities,
- instructions for final rites,
- guardians for children if any, and
- executors of the will.
Wills can only be used after the death of the individual, and need to be amended as and when there’s any change in assets.
Trusts, on the other hand, don’t need to be amended every time an asset is added. One can add assets in trusts at any point.
The assets can be used while the trust is ongoing.
There is less chance of disputes and contests as the trust is ongoing. There are tax benefits on certain types of trusts.
Both these instruments are recognized by law.
It is recommended that we use these instruments for the maximum tax benefits.
Leave Everything to Spouse/Civil Partner
The assets you leave behind for a civil partner or spouse are not taxable after death. Hence the amount you leave to them will not be taxable even when the heirs inherit this property.
In addition to this, the assets left behind by the spouse and civil partner will be combined assets, with a higher nil rate band threshold, in certain cases.
Paying Inheritance Tax
How do you pay inheritance tax in the UK? You need to pay the tax within 6 months of inheriting the property.
However, in certain circumstances, you can pay the inheritance tax in instalments for up to 10 years.
Paying Inheritance Tax in Instalments
- Mention on your inheritance tax account form IHT400 if you want to pay in instalments.
- You must pay the full tax if you’ve sold any of the inherited assets.
- Yearly payments will be due on the same date as the first instalment.
- You can pay inheritance tax in instalments on the house, shares and securities, inherited business, and agricultural property.
Paying Inheritance Tax Early
You can pay the entire amount of inheritance tax due at any time.
Simply write to the HM Revenue and Customs (HMRC) Trusts and Estates for the final assessment.
Calculate Inheritance Tax
Calculation of inheritance tax is not as difficult as it seems.
Inheritance tax is calculated at 40% of the total assets at the time of death. You can reduce the tax by reducing your assets, as mentioned above.
The Bottom Line
Paying your inheritance tax is not as complicated as it seems, however, calculating it yourself could be tricky.
There are many ways you can minimise the inheritance tax on your property, so you and your heirs/beneficiaries get the maximum benefit.
Enlist the help of reputed inheritance tax advisors and avoid paying extra taxes.