Inheritance tax is the tax on the estate of someone who has expired that includes his/her property, money and other possessions. The standard rate of inheritance tax is 40% but it is applicable only on the value of the estate that is above the tax-free threshold which is currently £325,000. For example if you have an estate worth £500,000 , the tax charged will be (£500,000 – £325,000) 40% of £175,000. The rate might be reduced to 36% if you have left 10% or more of the net value of your assets to a charity in your will.
Cases For Tax Reliefs and Exemptions
If you give some gifts while you are alive, they might be taxed after your demise. The rate of the tax will vary on the type and value of the gift.
There is also something called ‘Business Relief’ which allows some assets to be passed for free or with a reduced rate of tax.
Also if you have a farm or woodland, you can claim for ‘Agricultural Relief’.
There is normally no inheritance tax to be paid if one leaves everything above the £325,000 threshold to your spouse, charity, a community, club or a civil partner.
If you give away your home to your children or grand kids, the tax-free threshold increases to £500,000. This applies to stepchildren, adopted as well as foster kids.
When you pass your home to your spouse or civil partner, you have no inheritance tax to pay.
Who handles the tax payment?
After your demise, the person who is dealing with the estate, will have to pay the tax from the funds collected from your estate. He/she has to report to the HMRC for paying the Inheritance Tax.
People who have inherited your estate (the beneficiaries) do not have to pay any tax for the assets they have inherited. They may have to pay respective taxes for the gifts given to them in the will, for example, tax on the rental income from the home gifted to them.
People to whom you have given gifts might have to pay an inheritance tax if the value of those gifts exceeds £325,000 and you die within 7 years of giving it to them.
How to calculate the estate value?
List all the assets namely property, land, jewelry, money in bank, cars, shares, jointly owned assets, payouts from insurance policy and calculate their value as on the date of death of the person. Even gifts like cash or assets if given to someone in 7 years before the person’s death need to be included. After which the debts and liabilities like credit card debts, mortgages, household bills and alike need to be deducted from this amount as they reduce the value of chargeable estate.
Keep a record of how you worked out the value of the estate as the HMRC may ask to see the records for up to 20 years after the Inheritance Tax is paid.
However, any expenses incurred after the death of the person, like fees of the solicitor, cannot be deducted from the estate’s value for Inheritance Tax purposes.
Calculating the right assets and reporting for Inheritance Tax can be confusing leading to lots of miscalculations and mistakes. We at CoreAdviz guide you through the correct and current procedure to save your time and effort. Contact us for an end-to-end seamless service for Inheritance Tax calculation and reporting.