IHT or inheritance tax is calculated on the net estate value at the time of death. Your estate is evaluated at the total amount of your assets minus the liabilities.
You will need to value your assets much before your death to ensure you don’t pay much in taxes and your beneficiaries get the maximum benefit of your estate. The U.K government has many allowances through which you may save a lot of tax.
You can do this with the help of reputed inheritance tax planners.
Which assets get evaluated
The total estate at the time of death is considered for the calculation of inheritance tax. The assets included are –
- Money in the bank
- Life insurance
Valuing the Estate
The estate is evaluated after all assets have been identified and valued at the current price in the open market. At the time of death, assets can be distributed amongst the beneficiaries on the gross valuation of the estate (value of all the assets combined).
You can value the assets on the gross value at the time of death to calculate the inheritance tax owed. If you pay less inheritance tax, you will have to pay the U.K government interest on the amount that is still owed. In case you pay more, the U.K government will refund the excess amount and pay you interest on it.
Valuation of Assets
The valuation of assets should be valued at the same price it is expected to be sold in the open market at that point in time. This is the gross value of the estate.
These assets include all assets whether individually or jointly owned.
After valuing the assets, all liabilities must be subtracted from the assets. Liabilities include loans, mortgages, outstanding bills, and funeral costs.
The figure you now arrive at is the net valuation of your estate. You will calculate your inheritance tax on this amount.
How to calculate inheritance tax
Inheritance tax is as tricky as it is simple. You may pay more than your fair share if you are not careful. It is advisable to enlist the help of trusted estate planners to calculate the tax you owe.
IHT or inheritance tax is evaluated at the time of death on the total assets. Currently, the U.K. government is imposed at 40% of the total assets above the nil rate band.
The U.K. government does not impose any inheritance tax on assets below the threshold of £325,000. This means an inheritance tax of 40% on assets exceeding the nil-rate threshold of £325,000.
The good news is that you can increase the nil-rate threshold under certain circumstances. For example – you pay an inheritance tax of 36% if you leave more than 10% of your estate to charity.
Who evaluates the estate
You can valuate your own estate with the help of legal estate planning instruments – wills and trusts.
This helps you to lay down instructions for distributing your assets after your death.
If you have not evaluated your estate, then your executor or beneficiaries will need to valuate your estate after you.
Your estate needs to be reported to the U.K government immediately (before distribution of assets) and if there’s an inheritance tax, it needs to be paid within 6 months.
If you have not named an executor, then your beneficiaries will have to apply for probate before distributing your assets.
Key Steps in Valuing Someone Else’s Estate
Valuating someone else’s estate can be quite difficult. Following a step-by-step process may be helpful.
Step 1 – Take value of all the assets of the deceased. These assets include shares, property, trusts, and gifts.
Step 2 – Deduct mortgages, liabilities, unpaid bills, and funeral expenses from the total assets.
Step 3 – The final amount is the amount of the net estate. If the estate has more liabilities than assets, it can not be paid from the trust (if any).
Valuation of an estate for inheritance tax may seem easy, but it can be quite tricky. You may pay more than you need to if the estate is not evaluated properly. Another reason to pay inheritance tax could be not making enough use of allowances by the U.K government. These allowances include making trusts, gifts, and leaving property to spouses or civil partners.
It is better to value your estate during your lifetime to save on taxes. There is more reason to do this if you surmise that your estate could be more than the nil rate band threshold set at £325,000.
If you can’t valuate your estate during your lifetime, then your beneficiaries will have to evaluate your estate in order to distribute and pay taxes on it.
Enlist the help of trusted estate planners who can help you evaluate your estate and ensure that your beneficiaries get the maximum benefit.