You’re focusing on estate planning, getting all of your ducks in a row, then you stumble across the term inheritance tax. So, what is inheritance tax and how can it impact what your beneficiary will receive?
Inheritance tax involves the taxes that are paid on assets that are left when a person dies. How much does the beneficiary have to pay in taxes? Is there a way to avoid paying these taxes?
Assessing Your Worth
In order to draw up a will, you must first tally up all of your assets in order to get a precise idea of how much your estate is worth. This will allow you to will your possessions to one or more beneficiaries.
After a person dies, the government will assess how much their estate is worth, then they will deduct that person’s debts to come up with the total value of the estate.
Assets can include:
- Payout from life insurance policy
The big question here is how much you’ll have to pay in inheritance tax once the debt has been deducted from the estate’s total value.
Currently, the government requires you to pay taxes on inheritance on anything that’s above three hundred and twenty-five pounds.
No inheritance tax will be paid for the first three hundred and twenty-five thousand pounds of someone’s estate. A couple can leave a house that’s worth over six hundred thousand pounds without the beneficiaries being required to pay an inheritance tax since the three hundred and twenty-five thousand allowance is per person.
But if the inheritance is more than three hundred and twenty-five thousand pounds, the beneficiary will pay forty percent in taxes.
The government has recently introduced the main residence band. So, how does the main residence band work? The new main residence allowance is valid only on a main residence in which the beneficiary of a house is a direct descendant of the deceased.
Are They Any Exemptions from Inheritance Tax?
There are certain circumstances in which inheritance tax does not have to be paid. This includes people who die in active service such as police, armed forces personnel, paramedics, humanitarian aid workers, and firefighters.
Tax exemption also includes those who were injured during active service whose death has been hastened as a result of an injury that occurred during active duty.
Inheritance Tax for Spouses and Civil Partners
Civil partners and married couples are allowed to pass on their assets and possessions tax-free. The surviving spouse or partner is allowed to use tax-free allowances.
A civil partnership or married couple can pass on up to six hundred and fifty thousand pounds or up to nine hundred thousand pounds if their estate includes their home. However, there is a loophole. A person whose partner died before March 1972 will not qualify for the double allowance.
Are There Any Inheritance Tax Loopholes?
Gifts are one way to avoid paying inheritance taxes. Some types of gifts will always be tax-free. This includes gifts to charities and gifts between civil partners and spouses. There are also potentially exempt transfers. However, the time in which these assets where gifted will be crucial. Basically, as long as a gift is given more than seven years prior to death and the gift is not given to a trust or a business, then the beneficiary will not have to pay taxes. If the person doesn’t die within the seven-year period then the gift will be taxed.
Having a deed of variation in your will or putting your life insurance policy under a trust are other methods you can use to avoid inheritance tax. To learn more about how to avoid paying inheritance tax, click here.
ISA Inheritance Taxes
There are also ways you can avoid paying steep inheritance tax fees on an individual savings account. If the ISA is passed on to a civil partner or spouse at the time of death, they will not be required to pay inheritance tax. However, if a person leaves their ISA to someone else when they die, that money will still come with the forty percent inheritance tax.
To learn more, click here to read our ISA guide.
When Must the Inheritance Taxes be Paid?
Inheritance tax that’s due on possessions or money that’s passed on when a person dies is usually paid from that person’s estate. Basically, the deceased person’s estate is made up of everything they own, minus all of their debts such as funeral expenses and mortgage payments.
However, if inheritance tax is due on gifts that the deceased made during the last seven years prior to their death, then the person or people who received gifts will be required to pay taxes. If you cannot pay then the amount that’s due will come out of the deceased person’s estate.
The beneficiary is required to pay the inheritance tax by the end of the sixth month after the death.