August 09, 2021
Passing on one’s belongings be it monetary gifts, jewellery or property is the one solace to moving beyond the veil. However, the best distribution of that inheritance doesn’t just mean the proper allocation among your close ones by the memory of merit alone but also it is a high financial decision. After all, the inheritance in most cases is a means of support and it just doesn’t do to have that support’s value diminish because of inheritance tax issues that could have been at best avoided or reduced. Here’s a quick guide that’ll keep you prepared and ensure that inheritance tax does not diminish the charms of what you leave behind for those who’ll carry on your memory and name.
Inheritance tax – What is it exactly?
It is the tax that is calculated based on the value of the estate and other assets (deductible post demise) and it is paid from the same. After this, the proceedings go to the heirs.
The workings of Inheritance tax explained
The total value of assets will be worked out by the government (including liabilities). Outstanding debts would also be considered in this. The main assets would be:
Monies in bank accounts
1- Does Inheritance tax always apply?
When you are exempt from it: Inheritance tax is a complex thing as even if you do not need to pay the same, you still have ample forms to fill. However, the good news is that it is not always applicable. For instance: (1) if your estate’s value is found to be below the figure of £3,25,000 (2) is the estate is left to your civil partner or spouse (this includes leaving everything above the £3,25,000 figure)
If it goes above this figure then 40% tax is the amount levied which is why the spouse is the preferred choice of the inheritor. Even if you fall below the above threshold you would need to still report the same to the HMRC.
2- What if you give your home to your children?
Well, this is a bit on the brighter side as the threshold amount can increase in this case to around £5,00,000 (this includes foster, stepchildren and even adopted children). The same rule applies to grandchildren. Also, if your estate’s worth is below your threshold then this can be automatically added over to your partner’s threshold upon your demise if you are in a civil partnership or married.
3- When does Inheritance tax have to be paid?
You have a six-month window after inheriting to make the payment (roughly six months post the decease). When dealing with the property if you are unable to pay the lump sum instalments can be opted for over a maximum period of ten years. However, interest charges are applicable and thus, it might make better sense to approach an accountant over the same as it doesn’t make sense to part with cash needlessly.
4- How is Inheritance tax calculated?
If let’s say your estate is worth £5,00,000 and the tax-free threshold that you have been given is £3,25,000. Inheritance tax is levied at 40% on £1,75,000 (the £5,00,000 estate’s worth minus the £3,25,000 threshold).
When can you pay the reduced rate of Inheritance tax?
The reduced rate of Inheritance tax is 36% which applies only to part of your assets. But you first need to leave at least 10% or even more of the actual ‘net value’ to a charity of your choice.
5- What is taper relief?
Interestingly, the gifts that you have given while alive might still be taxable post your demise. The factor considered here was when that particular gift was given. Taper relief is the term used to refer to whatever Inheritance tax is charged on a gift when it is less than about 40%. In most cases, for taxes to apply the gift needs to be of a value of over £3,25,000 and the death of the giver would have to take place within seven years.
6- What have exempted gifts?
Small gifts that are made from your income do not count towards taxes. Examples of such are Christmas gifts or birthday presents. Such gifts are called exempted gifts. Furthermore, if gifts have been given by yourself and your civil partner or spouse then there is no Inheritance tax applicable. There is no limit to the amount that can be given but the condition is that they need to be living in the UK permanently.
£3000 worth in the value of gifts can be given each tax year without this seen as an addition to the value of one’s estate. This is part of one’s annual exemption.
7- What defines a gift?
Any possession having a value example property, money and the like
Any loss of value that has been willingly incurred. For instance, you sell the house you own to your child for a lower than market value amount. The difference computed would be considered to be a gift even though you did not openly demarcate it as so.
Up to £250 in gifts on an individual basis can be given under the exemption as long as it is not used twice.
Thus, as you can see Inheritance tax is a complicated issue and considering that you want to leave your legacy behind in as much of its entirety as possible it would be best to consult an expert on the rules applicable so that you and your loved ones can get the best bet. One such way of doing so is by contacting a reputable firm of accountants. Doshi Accountants has dealt with accounting and taxation matters of its client for over two decades and more. Thus, if you have inheritance tax-related queries, we are happy to assist! Do contact us for a free no cost no obligation meeting where we can discuss the details of your future plans and offer you the relevant advice.