What is the tax rate on inheritance in the U.K?
What is Inheritance Tax
Inheritance tax is paid on the net value of the deceased’s estate. The HMRC imposes a tax rate of 40% on inheritance above the nil rate band. The nil rate band threshold is set at £325,000. This means that the estate will have to pay inheritance tax at the rate of 40% on the estate that exceeds £325,000.
The HMRC has made many provisions to avoid paying these taxes. For example – The rate of inheritance tax can be reduced to 36% if more than 10% of the estate is left to charity.
A trusted inheritance tax planner can help you save the most in taxes.
How to calculate the total estate
The total estate is valued at the cost of total net assets owned by the individual at the time of death.
Net assets = gross assets - liabilities.
Gross assets are the sum of all the assets like properties, bank accounts, trusts, and life insurance.
Liabilities amount to the total mortgages, loans and money owed.
In case the liabilities are more than the assets, the amount is deducted from the assets in the estate, except the trusts. Trusts are protected and can only be used according to the wishes of the trustee.
Who pays inheritance taxes
The inheritance tax is paid out of the estate. The due date to pay the taxes is 6 months from the date of death. During this time it is imperative to calculate the total estate and the taxes.
However, if the estate assets are not liquid, in certain circumstances, the tax may have to be paid by the beneficiaries or executors of the estate.
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Estimating the estate of the deceased
If the estate has already been valued and has a will and trust, the executors and beneficiaries only apply for probate and distribute the assets as instructed.
The actual problem arises when there is no will or evaluation of the estate at the time of death. Executing the estate and distribution of the assets is left to heirs and beneficiaries.
In this case, the valuation of the estate of the deceased has to be done at the earliest because the estate has to be reported to the HMRC. Even if it is not possible to arrive at absolute figures, an estimated valuation can be submitted.
The inheritance tax is calculated on this estimate.
Tip: Consider paying more than the estimated amount of inheritance tax because if more is owed, the government will impose an interest rate on the deficient amount. However, if excess tax is paid, the government will refund the excess amount along with interest.
How to avoid inheritance tax
There are many ways to avoid inheritance tax. The government of the U.K makes allowances for the taxpayers to avoid inheritance tax.
These allowances are including –
Although gifts are exempt from inheritance tax, all gifts made in the last 7 years of death will attract an inheritance tax on a scale called the taper relief slab.
The last 3 years from the date of death attract a full inheritance tax. However, it reduces as the timeline moves further from the date of death. There is no inheritance tax for gifts made 7 years before the date of death.
Raising the nil rate threshold
If the individual combines their assets with their spouse’s they can increase the nil rate band to £650,000.
Another method to increase the nil rate band is to include the resident band in it. The HMRC has introduced the resident band at £175,000. If the individual owns a house that they reside in, they can add the amount up to £ 175,000 to the nil rate band of £ 325,000 and increase it to £500,000.
Inheritance tax is calculated on the amount of the estate that exceeds the nil-rate band set at £ 325,000. There are ways to raise this band and avoid paying taxes.
The rate of inheritance tax can be reduced by using the allowances made by the government of the U.K.
It may seem unfair to pay taxes on property and assets that have already paid taxes, however, the government has its reasons to impose an inheritance tax.
A good inheritance tax planner can help avoid the inheritance tax as well as the other taxes, like capital gains tax, that come with it.