If you’re looking for information on inheritance tax laws in the UK, you have come to the right place here at CD Solicitors Reading. In this instalment, you will discover various laws related to inheritance tax as well as what you need to do in order to minimise your tax outgoings.
In simple terms, inheritance tax is the tax that is levied on the estate of a person who has died.
As far as the estate is concerned, for the purposes of inheritance tax calculation, it usually includes savings of the individual, pension fund of the individual, all the possessions including property as well as any other assets.
In some cases, any property or money that is given away during seven years prior to the death of the person may also be included though there are certain exemptions.
It is important for you to keep in mind that the first £325,000 of the estate is tax free.
In other words, if the value of the estate passed on is up to £325,000, no tax needs to be paid.
However, if the value of the estate is calculated to be above £325,000, an inheritance tax of 40% of the value exceeding £325,000 needs to be paid.
This limit was fixed in 2010 and it’s unlikely to be revised soon.
There are also certain exemptions. For instance, no inheritance tax needs to be paid in case the deceased leaves the whole estate to their wife, husband or civil partner.
Similarly, if the £325,000 limit isn’t utilised fully by the wife, husband or civil partner, the unused part may also be passed on to the surviving partner.
Anything that one leaves to charity is not included in the calculation for inheritance tax. Certain amount of gifts each tax year are also exempted from inheritance tax.
Certain changes have also taken place regarding the calculation of inheritance tax over the past few years. For instance, an additional exemption has been provided for people who leave their homes or the sale proceeds of their home to their grandchildren or their children.
This limit is currently £100,000 but it will keep increasing by GBP 25,000 each year until April 2020. In other words, the rules are always changing and most of the existing rules are too complicated. This is the reason, legal experts recommend hiring the services of a professional estate planner in order to minimise your tax outgo due to inheritance tax.
As far as inheritance tax rules for civil partners and married couples are concerned, they do not need to pay any inheritance tax when the estate is passed on completely to the living partner.
However, there are also certain limits that need to be adhered to in order to make use of the tax free allowance.
In simple terms, the current rules allow a married couple to leave up to £850,000 of estate including the home without paying any inheritance tax.
When it comes to gifts, some of the gifts are completely tax-free including gifts between civil partners, gifts to charities as well as gifts between spouses.
There are also certain other kinds of gifts that are potentially tax-free as the tax exemption depends on the time when the gifts were made. For instance, any gift made more than seven years before the death of the individual is not liable to inheritance tax.
The inheritance tax is usually paid from the estate of the deceased. As mentioned in the beginning, the estate includes everything owned by the person after adjusting for all the debts such as funeral expenses as well as outstanding mortgage and other such things. Keep in mind that the inheritance tax needs to be paid on any gifts made during the last seven years before the death of the person and in case they do not pay the tax, this tax is also deducted out of the estate value. The heirs are required to pay the inheritance tax by the end of the six-month after the death of the person. Before the inheritance tax is paid, an inheritance tax reference number also needs to be obtained in order to make the payment.
Overall, the rules for inheritance tax are complicated and there are several ways one can save a lot of money with some astute estate planning. It is recommended to get in touch with professionals who have a lot of experience with estate planning in order to understand everything and to make a plan for minimising inheritance tax.