Inheritance Tax Explained The Basics

About Inheritance Tax

What Is Inheritance Tax?  Dead or Alive:

Contrary to popular belief, inheritance tax is not tax payable on death, it is a tax payable when you transfer ownership of assets from one to another. 

This means inheritance tax is not only payable when you transfer assets on death, it can also be payable when you transfer or give assets to another person or a trust when you are alive.

Tax paid on death

Inheritance Tax, commonly known as IHT, is a tax charged on the value of an individual's assets, such as property, personal possessions, savings and investments upon their death.

Tax paid when alive

Inheritance tax also applies to certain gifts that a person may have made during their lifetime, called Chargeable Lifetime Transfer. 

It can also include any share of assets that the deceased person owned jointly.

Who pays Inheritance Tax? IHT Expert Tax and Estate Planning Advice

Inheritance Tax applies to individuals, meaning that a husband and wife or civil partners must look at their own situations separately.  However, concessions were made October 2007 where a deceased partner's unused tax free allowance can be carried over to the partner on death.

UK Domicile

If an individual is domiciled, this meaning that the UK is your permanent home or the place where you expect to return to if you moved overseas, Inheritance Tax is charged on all of your assets throughout the world.  This will include any overseas assets such as a holiday home.

UK Resident Only or if you live outside the UK but have Assets In UK

Individuals domiciled outside the United Kingdom i.e.  not your permanent home, or the place you expect to return to, are subject to Inheritance Tax in respect of assets situated in the United Kingdom only such as a house, whether resident in the United Kingdom or not.

How Does Inheritance Tax Work

Broadly speaking, inheritance tax works on the following basis:

• Value of exempt transfers is worked out - for example transfers to your spouse or civil partner are exempt
• Value of  chargeable transfer estate is calculated (this may include any gifts made in the last 7 years)
• Your Inheritance tax free allowance is deducted - (detailed in Rate and Allowances section)

If the amount gifted or transferred is actually above the inheritance tax threshold, inheritance tax is due

• Your taxable estate is then taxed at the applicable rate (the rate will depend upon whether this is a lifetime or death gift)

Who pays the inheritance tax bill?

Lifetime Chargeable Transfers or Gifts:

When you make gifts (or cumulative gifts in the last 7 years) above the inheritance tax threshold, you become liable to inheritance tax and need to settle the inheritance tax bill yourself.

Death - Inheritance Taxes due on Transfers on Death:

The executors or your estate and/or your beneficiaries will have to settle any bill.  If provision has not been made to cover the potential Inheritance Tax bill and it is a large one, it may have to be financed.

This is because the executors of your estate, usually your beneficiaries, cannot normally gain control of the money in your estate until the Inheritance Tax bill has been paid.

This can be done through the bank of the deceased where an executorship account can be opened for executor transactions.  There can be tax relief on the interest on a loan for these purposes.

Review Inheritance Tax

If you have already looked at your estate and have made plans.  Well done, your beneficiaries should be proud of you.

Keep up to date: The Chancellor keeps changing the rules

Now that you have made plans you must make sure that they are up to date or you could find your beneficiaries ending up with less than you intended.

• Did you know the Life Insurance Trust Rules have changed?  Be careful if you change beneficiaries.
• Did you know the rules on Investment Trusts have changed?  Is your trust now taxable?
• Is your Will up to date?  Rules have changed on property and rights that you may have left for your spouse or family.
• Pre-owned assets tax - have you heard about this?  If you have placed something in trust that you enjoy a benefit from - H M Revenue and Customs now tax it?
• Has your estate gone up faster than the nil rate tax threshold?  Each year the nil rate band is reviewed in the Budget by the Chancellor but that does not mean the tax bill is staying the same.  

You need to be aware of any growth that takes place within your estate and make sure that it is covered. 

Since planning for Inheritance Tax have you actually looked at the amount the value of your savings, investments, property and possessions have increased by?  Contact us so we can help in reducing inheritance tax.

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