Your Personal Status

Broadly speaking, inheritance tax affects us all. 

Inheritance Tax implications affect many people.  You need to be aware of how it affects you and what you can do to plan for it.

Below are the areas that apply to your position:

• I am married/in a civil partnership - what happens with Inheritance Tax when I die?
• I am not married/in a civil partnership but live with my partner - what happens with Inheritance Tax when I die?
• What happens if I ignore the threat of Inheritance Tax and do nothing?
• Inheritance Tax is only for the wealthy - it won't affect me.
• I am not worried about Inheritance Tax.  My heirs can sell my estate to pay the bill.

1.  I Am Married / In A Civil Partnership - What Happens With Inheritance Tax When I Die?

This depends on what provisions you make whilst you and your partner are still alive. 

Made Wills - But Only Postponing the Tax?

If you have made Wills you may have stated that you wish to leave all of your assets to each other. 

As transfers of assets between legal partners are exempt from Inheritance Tax it means that no tax will be due on the first of you to die.  You will not have used any of your tax free allowance though.

When the second person dies, Inheritance Tax will be payable on the total of the assets you transferred and the assets held by the second partner to die. 

This merely has an effect of postponing any tax payable, not reducing it.

Will Gifts on First Death

If, when you made your Wills you each left assets to people other than your partner, on your death the assets would pass to those people, thereby reducing your estate on death and using your nil rate tax allowance.

For example, you may will your share of the house or investments to your children.  But establish a trust wording so that your partner can live in your share, normally a rent should then be charged for this part.  You have used one of the nil rate tax allowances.

Do not forget that each person can use the nil rate band.  This means that currently, each partner can give away up to their nil tax allowance in worth of assets to reduce the value of their estate.

On second death, the other part of the property is passed to heirs, again using the second partner's nil rate allowance.  You have technically used two allowances and drastically reduced any inheritance tax liability. 

Reduce the tax bill

As the example demonstrates, if you intend to eventually pass all of your assets onto your children, if it is affordable, some could be given directly on the first death, rather than leaving it until the second death. 

By reducing the value of your estate, you will reduce the eventual Inheritance Tax bill.

2.  I Am Not Married But Live With My Partner - What Happens With Inheritance Tax When I Die?

Each person, whether married / in a civil partnership or not, is entitled to use up own their nil rate tax band on death.

If you were married / in a civil partnership and left everything to your spouse, all of your assets would pass free of Inheritance Tax.  This is because transfers between spouses are exempt from Inheritance Tax.

If you are not married / in a civil partnership you will not benefit from the exempt transfer of assets between legal partners. 

However, on your death up to the value of the nil rate tax band of your assets will be free of Inheritance Tax.

How to reduce the tax bill:

We suggest you read our top tips for beating inheritance tax as making other gifts under the seven year rule or set up trusts during life that will assist in reducing the inheritance tax liability.

3.  What Happens If I Ignore The Threat of Inheritance Tax And Do Nothing?

On death, Inheritance Tax is charged on the net value of a persons estate.  This is your assets less your liabilities i.e.  debts, immediately before death.

Certain exemptions may apply that could reduce the value of the estate. 

There are also certain reliefs that could reduce the tax payable.  Many people build up an Inheritance Tax liability without even realising it. 

This is simply as a result of the growth in value of their home and a gradual increase in personal wealth.  Think of it like this:

"I bequeath 40% of virtually everything I own to the Tax Man"

If you think like this, you are likely to take action. 

The more you leave, the greater the potential tax bill for your loved ones. 

They can sell my assets to pay the bill:

It would appear simple enough for your beneficiaries to pay the tax liability by selling some of the assets of your estate.  However, it is not usually possible to sell any assets until Probate (or Letters Of Administration) has been granted.  This cannot normally be obtained until at least some of the Inheritance Tax liability has been paid.

This is a vicious circle and may mean that your beneficiaries could have to take out a loan to pay the tax liability.    Only when some of the tax has been paid will they be able to sell off some of the estate to pay off the loan. 

It is therefore clear that no matter how much money there is in a persons estate, the tax man must always be paid first.

4.  Inheritance Tax Is Only For The Wealthy - It Won't Affect Me.

For Inheritance Tax purposes a persons estate is made up of the following:

• Any gifts that the person made within seven years of their death.  These may not be counted if the gifts are covered by exemptions.
• Assets that the deceased person owned or owned jointly with another person.  This includes personal possessions.
• The value of trust funds that the deceased person benefited from.
• If the deceased person gave away some property, it could be included within the estate.  This could be the case if they gave the ownership of their house to someone but continued to live in it.

When working out a deceased persons net estate, things such as bills, mortgages and funeral expenses can be deducted from the value of their assets.

Property has outstripped growth in the nil rate tax band, to the extent that many hundreds of thousands of people who would never have been caught by this tax, now are.

You do not have to have a very large estate to fall into the Inheritance Tax trap. 

Many people build up an Inheritance Tax liability without even realising it.  This is simply as a result of the growth in value of their home and a gradual increase in personal wealth. 

The more you leave, the greater the tax bill for your beneficiaries.

5.  I Am Not Worried About Inheritance Tax.  My Heirs Can Sell My Estate To Pay The Bill.

It would appear simple enough for your beneficiaries to pay the tax liability by selling some of the assets of your estate.

However, it is not usually possible to sell any assets until Probate (or Letters Of Administration) has been granted.

This cannot normally be obtained until at least some of the Inheritance Tax liability has been paid.  This is a vicious circle and may mean that your beneficiaries could have to take out a loan to pay the tax liability.   

Only when some of the tax has been paid will they be able to sell off some of the estate to pay off the loan.

It is therefore clear that no matter how much money there is in a persons estate, the tax man must always be paid first.

How to reduce the tax bill:

We suggest you read our top tips for beating inheritance tax as making other gifts under the seven year rule or set up trusts during life that will assist in reducing the inheritance tax liability.