Inheritance tax concerns the taxes that will be legally due on all of the applicable assets when a person dies. The tax procedures can be very complicated, which is why many people opt to appoint tax accountants to take care of the finer points that will be concerned with their inheritance tax. Generally, inheritance tax must be paid when the value of a person’s estate is calculated to be in excess of £325,000, although this can change depending on the circumstances of a person’s will or other factors that must be accounted for.
For many people, inheritance tax is not something that a lot of consideration goes into, but to ensure that your loved ones receive the most benefit from your assets when you pass, it is extremely important. While forensic accountants can be responsible for handling the documentation and organizing the execution of your will, gaining a further understanding of what inheritance tax consists of can help you to work with specialist accountants to make sure that your estate and assets are handled to your individual requirements.
How inheritance tax gets paid
Upon the death of an individual, the required inheritance tax becomes the responsibility of the appointed will executor, with the possibility of external assistance from qualified accountants. This has to be calculated correctly and paid to the H M Revenue & Customs (HMRC) in full within a reasonable timeframe. There can also be extra requirements for the tax to be paid by other beneficiaries of the will if they receive additional income from a property or asset that was left to them.
Future planning for inheritance tax
To ensure that inheritance tax is prepared for, there are a number of things that individuals can do to help their family after their death. Primarily this involves using specialist accountants to perform a full analysis of your estate and then deciding how to separate your assets by creating a will. Once you have a full report of your financial standing, you can work with qualified accountants to decide who will receive a percentage of your assets and who will be appointed the executor of your will, who upon your death will follow out your wishes.
Getting advice during the creation of your will is important as there are many legal factors to take into account regarding your estate, especially regarding which family member will receive property or valuable assets. Assets left to spouses will not be liable for inheritance tax, no matter to what value your estate is calculated to be. However, estates left to children or grandchildren are applicable for inheritance tax but the threshold is raised to £425,000. Deciding who will receive your estate in your will, will prevent unneeded inheritance tax from being paid.
What inheritance tax you will have to pay
Inheritance tax is calculated at a standard rate of 40% for any value above the £325,000 allowance for estates left to individuals who are not spouses, or above £425,000 when left to children. No matter how much your estate is worth, any amount above the threshold will be taxed at 40%, unless you undertake a form of relief or exemption, in which case the amount can be reduced.
Tapered relief on inheritance tax
Tapered relief is the act of giving a gift to another person or people whilst you are still alive. Gifts can be given on an annual basis up to the sum of £3,000 total, this can be split as many ways as you wish. The gifts are free from inheritance tax as long as it was given 7 or more years before you die, however, if the gift was made 4 years before death, the inheritance tax could be lessened, with the rate decreasing in accordance with time passed. Tax accountants can arrange your gifts to be given each year in accordance with your wishes and provide an easy and legal way to reduce the overall value of your estate without incurring extra taxes.
Placing a sum of money or an asset into a trust removes the inheritance tax that would normally be applied. Once an asset or cash has been separated into a trust fund, it can no longer be accessed except by those it was intended for. This can provide tax-free money to be spent on a dependent child’s education or other intended for future investments.
Charitable donations can reduce the overall amount of inheritance tax you will have to pay if the amount donated meets requirements. Starting in your will that you wish 10% of your estate value to be donated to a charity of your choice will reduce the amount of inheritance tax you have to pay by 6%, leaving the remainder of your estate taxed at only a 34% rate.
Business relief can either be granted whilst a person is still alive or through a declaration in their will. With the help of tax accountants specializing in business relief, you can fill out the IHT400 form and the ITH413, which will request for relief on the inheritance tax paid on business equipment, real estate, and unlisted shares by up to 100%.
Selling or renting your property
As with the tapered relief gift giving, a similar relief can be applied to properties. If a property is not being inherited by a spouse or child, it is normally liable for the full 40% of inheritance tax for any value over £325,000, unless proper preparation is made in advance to reduce or eliminate the inheritance tax that will be due. There are multiple ways in which inheritance tax can be avoided on properties:
- The owner of the home must have resided in a different property for a period of 7 years.
- The property can be given away to a friend or family member and must have remained in their possession for 7 years.
- The owners can choose to transfer ownership of the property but still reside in it under the agreement to pay the standard rent, this must have been in effect for 7 years and the new home owner can’t also be living in the property.
If the 7-year commitment hasn’t been met, there is a lowered bracket of inheritance tax that can be applied, in the same format as the tapered relief, to ensure that inheritors receive some benefit. It is important to get the preparations for inheritance tax right to ensure that your family retains the most value from your estate, for correct estate calculations, tax accountants can ensure that nothing has been missed that your loved ones could be liable for.