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Table of Contents
- Inheritance Tax Planning in London, UK
- How Inheritance Tax Works
- Additional tax allowances
- Valuation of Assets for Inheritance Tax Planning
- Paying Inheritance Tax in the UK
- Other taxes on inherited estate
- Excepted estate
- Options to pay inheritance tax
- Paying inheritance tax in instalments
- Who Pays Inheritance Tax
- The Bottom Line
Inheritance Tax Planning in London, UK
Inheritance tax planning is a part of estate planning. A person’s assets, debts, and liabilities are valued at the time of death, and it is on this amount that inheritance tax is levied. Heirs may have to pay a large portion of their inheritance in taxes if there is no estate planning.
The best way to do estate and inheritance tax planning is to take expert inheritance tax planning advice and ideas from a trusted estate and inheritance tax adviser.
How Inheritance Tax Works
Inheritance tax is the amount paid by the estate of someone who has passed, it can also be paid during the person’s lifetime or before the due date after death.
The standard inheritance tax is 40% of your entire estate. You are required to pay 40% on the estate that’s above the nil band.
The current nil band is set at £325,000, which means you don’t pay any inheritance tax on this amount.
Inheritance tax isn’t payable if you leave everything to your spouse or civil partner.
Additional tax allowances
You can make use of another tax allowance called the ‘resident nil-band.’
You can be eligible for this allowance if you pass on your residence or sales proceeds of your residence to your children at the time of death.
Currently, in 2022, the residence nil-band is £ 175,000 which means that your total IHT allowance could go up to £500,000. A couple can collectively pass on up to £1m of IHT tax-free estate to their children.
Valuation of Assets for Inheritance Tax Planning
Valuation of assets is a continuous process and needs to be done every time you add wealth to your financial portfolio. This saves your beneficiaries and heirs a lot of trouble after your death.
The most important aspect is that your estate is distributed exactly as you want, without any disputes or bad blood.
Paying Inheritance Tax in the UK
So you’ve inherited property, and now have inheritance tax to pay.
While you don’t need to pay any tax at the time of inheriting property, you still need to pay certain other taxes.
Other taxes on inherited estate
Capital Gains Tax – You would have to pay capital gains tax at the time of selling the property or shares you’ve inherited.
Tax on Interest Gained – You would receive some amount of interest on the money and property you’ve inherited. You will have to pay tax on this interest gained.
Income Tax – You would have to pay income tax on any profit you get from your inheritance like rent from inherited property or dividends on shares.
Excepted estate
In certain circumstances, you don’t need to report the value of the inheritance as the government will regard it as ‘excepted estate.’
The estate is excepted if
- The value of the estate is below the threshold value at the time of the person’s death.
- The deceased left their estate to a surviving spouse or civil partner.
- The estate owner left it to a UK registered charity and the value of the estate is less than £1m.
- The deceased had been living out of the UK permanently when they died, and the assets in the UK have a value of less than £150,000.
There are certain instances when you’ll have to send full details of the estate even if there is no inheritance tax due –
- If the deceased gave away more than £250,000 in the seven years before they died.
- They possessed foreign assets valued at more than £100,000.
- If the gifts given in the last 7 years of their lives incurred any benefits.
Although you can value your estate and calculate the inheritance tax payable, it is best to go through a trusted tax planner.
Options to pay inheritance tax
Inheritance tax can take a huge chunk of your estate away if not planned properly. Heirs may find it very difficult to pay the IHT. What are the options you have to pay the inheritance tax?
Bank Loan/insurance
If you are unable to pay inheritance tax, you’ll have to take a bank loan using the inherited property as security.
The estate owner can also insure the estate and have an insurance policy to cover the cost of the tax.
It is extremely important to consult a tax adviser on the viability of the options. You need to take into consideration interest rates and the cost of the policy premiums as well.
Paying inheritance tax in instalments
The inheritance tax must be paid in 10 instalments, with the first one after six months of the death of the estate owner.
You can pay inheritance tax in instalments if the estate has
- Property
- Listed shares or securities
- Unlisted shares
- Business
- Gifts of buildings or shares and securities.
Who Pays Inheritance Tax
Inheritance tax is paid from your estate after your death.
Your heirs must pay inheritance tax by the end of the sixth month after your death. This tax needs to be paid with a reference number obtained from the HMRC. You need to apply for at least three weeks for this number before the payment needs to be made.
But if there is a tax due on gifts you made in the last seven years before your death, the people who received these gifts must pay taxes on the gift amounts. If these people do not pay the amount then it is taken from the estate.
The Bottom Line
Paying inheritance taxes and planning estate is tricky. It is best to take advice and inheritance tax planning ideas to help you to avoid as much tax as possible. You can save inheritance tax by giving wedding gifts to children or grandchildren. Even though you think inheritance taxes may not amount to much, they could eventually add up to a lot.
Reach out to our inheritance tax advisers for expert advice. You could save a lot on taxes with the proper financial planning.