About Inheritance Tax
Any phrase that contains the word tax is bound to be an unpopular, but unfortunately tax is something we all have to accept and get on with. When it comes to ‘inheritance tax’ though, the lack of knowledge that surrounds this particular topic is often quite surprising – hopefully we’ll be able to help you understand the basics.
Simply, when a person dies, if their estate totals more than £325,000, the assets that make up the estate – such as property, investments and savings – are subject to taxation. Not everyone pays inheritance tax, however, which is why it is important to keep the £325,000 figure in your mind. This is the inheritance tax threshold that is currently in place. Anyone who has assets totalling less than that amount will not be taxed; anyone with an estate of more than that will be.
Inheritance tax is simply a tax on money and possessions that you leave behind after you die. It also affects ‘gifts’ that you leave during your lifetime.
As it stands the tax free inheritance allowance of £325,000 is expected to remain the same until 2015.
You may well be wondering: ‘If I’m no longer around, how and who will pay the tax bill on my estate?’ Put simply, the inheritance tax bill will be paid by the executor of your estate, with the tax generally being paid using funds from your estate and assets. An estate consists of everything you own, less debts that are still in effect, such as a mortgage and funeral expenses.
You may also ask: ‘If I sign over some of my assets to family members before I die, will I still be hit with inheritance tax?’ The answer to this depends on what you intend to give as a gift and the timing of your actions. For instance, even if the value of your estate is over the threshold, there are ways in which you could pass on assets without having to pay inheritance tax. One of the most common ways is utilising ‘potentially exempt transfers’. Often referred to as ‘PETs’. If you survive for more than seven years after making a ‘gift’ to someone, the gift is usually exempt from inheritance tax no matter what the value. If you die within seven years. however, the person who received the gift may be liable for taxation on it. This is why it is important to plan and prepare for inheritance tax early. Other ways you can pass on assets without having to pay the tax is through business, woodland, heritage and farm relief; wedding and civil partnership gifts; charity exemptions; spouse or civil partner exemptions, and small gift exemptions.