What is it?
Inheritance Tax is paid on an estate when somebody passes away. It's also payable on trusts or gifts made during a person’s lifetime. On average, most estates don't have to pay Inheritance Tax because they're valued at less than the threshold (£325,000 in 2014-15). Inheritance tax is payable at 40% on the amount over this threshold.
How do you know if you are over the threshold?
To find out if Inheritance Tax is due on an estate, you must first value the estate. This means adding up the value of all the assets in the estate - such as a house, possessions, money and investments - and deducting any debts the deceased may have owed, including household bills and funeral expenses.
An estate also includes the deceased's share of any jointly owned assets and the value of any assets held in trust.
You should also review any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren't exempt, include them in the overall value of the estate.
Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2014-15. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die.
Who is responsible for paying Inheritance Tax?
Inheritance Tax is payable by different people in different circumstances. Usually, the executor or personal representative pays it using funds from the deceased's estate.
The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax - but this is not common.
Can I reduce the amount of Inheritance Tax that I have to pay?
There are a few ways that you can reduce the amount of inheritance Tax that you have to pay, such as:
- Annual inheritance tax gift exemption: The first £3,000 given away each tax year is completely ignored as part of your estate and is not subject to Inheritance Tax if you die. If you don’t give away the money this year, you can carry it forward for one tax year (no more) and use it then.
- Gifts to charities and political parties are inheritance tax-free: Leaving money to a charity can help to lower the amount that you have to pay.
- Small gift exemption: Gifts of no more than £250 to any one recipient per tax year are excluded from inheritance tax (and are not counted toward the annual gift exemption). For example someone with 12 grandchildren could give each of them £250 annually as a birthday present and it wouldn't be counted as part of the estate.
- Gifts on marriage: Gifts of £5,000 from parent, £2,500 from a grandparent, and £1,000 from anyone else made to a bride of groom are exempt from Inheritance Tax.
- Woodland, heritage, farm and business: If you own an agricultural property that's part of a working farm, then a percentage may be exempt from tax. Similarly if you own woodland, those who receive it in your will can apply for the timber on it, but not the land itself, to be deemed exempt. Do check what happens when the timber is sold, as inheritance tax may apply at that time.