UK Inheritance Tax
What is Inheritance Tax?
Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime. Most estates don't have to pay Inheritance Tax because they are valued at less than the nil rate band threshold (£325,000 in 2010-11).
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 2010-11. 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. Typically, 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.
Under what circumstances is Inheritance Tax payable?
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 evaluate 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 (see more below).
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:
- Spouse or civil partner exemption. Your estate usually doesn't owe Inheritance Tax on anything you leave to a spouse or civil partner who has their permanent home in the UK - nor on gifts you make to them in your lifetime - even if the amount is over the threshold.
- Charity exemption. Any gifts you make to a 'qualifying' charity - during your lifetime or in your Will - will be exempt from Inheritance Tax (see more in the link below).
- Potentially exempt transfers. If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.
- Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount. You can also use your unused allowance from the previous year, but you use the current year's allowance first.
- Small gift exemption. You can make small gifts of up to £250 to as many individuals as you like tax-free.
- Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.
- Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax is available.
To find out more about UK Inheritance Tax please talk to a qualified Holborn Assets adviser.