The UK Inheritance Tax is a way for the government to raise money to fund the nation’s social safety net and help finance state-sponsored social programs. It works by taxing the estate of someone who has died and leaving wealth to their heirs. You’ve probably seen it before, when people are saying they’re giving away everything they own in order to avoid paying inheritance tax. But did you know that there are ways to legally prevent yourself from being taxed on your estate? Find out how in this article!
How the UK Inheritance Tax works?
If you are an individual who inherits money or property, you may be liable to pay the UK Inheritance Tax. The Inheritance Tax is a tax that applies to inheritances of £325,000 or more (or if the deceased person’s estate is worth more than this, the amount above which inheritance tax is payable).
The Inheritance Tax is levied at 40% of the value of the inheritance, with a minimum charge of £325. This means that if your inheritance is worth £500,000, you will have to pay £100,000 in Inheritance Tax. If the deceased person was married or in a civil partnership when they died, their spouse or civil partner may also become liable for Inheritance Tax on any inheritance they receive.
If you are not an individual and your organisation owns shares in a company that has been sold and the shares have been transferred to another party as part of the sale process, then you may also be liable for Inheritance Tax on any benefits that are paid as part of the sale process (for example, share options or cash payments).
If you were involved in providing personal services to someone (for example, care work), and that person dies leaving you their estate, then you may be able to claim relief from Income Tax and/or National Insurance on some or all of your income from that relationship. To find out more about this relief available to you, please speak to one of our advisers.
Ways to avoid the Inheritance Tax
If you are planning to leave an estate worth more than £325,000 (or €450,000) to anyone other than a spouse or civil partner, you may have to pay inheritance tax. There are a number of ways to reduce your liability, and there are also some reliefs and exemptions available.
The basic rule is that if you die leaving an estate worth more than the value of your lifetime allowance, then the entire estate will be taxed at 40% on the excess value. If you die leaving an estate worth less than the lifetime allowance, then the first £325,000 of the estate will be exempt from tax and any amount above this will be taxed at 25%. There is also a special exemption available for monies left to charity.
There are several ways to reduce your UK inheritance tax liability. You can make provision in your will to avoid paying tax on any part of your estate, or use trusts to take advantage of tax reliefs. You can also make gifts directly to charity without incurring Inheritance Tax. Finally, there are various reliefs and exemptions which can reduce or eliminate entirely your inheritance tax liability.
How do I know if my estate is liable for inheritance tax?
If you are the sole beneficiary of an estate worth more than £325,000 (€400,000) at the time of your death, then you will be liable for Inheritance Tax (IHT). If there are other beneficiaries who are also liable to pay IHT, then the estate will have to divide its assets equally between them.
The tax is paid by the beneficiary on the value of their inheritance, plus any additional relief that they may be entitled to. The amount of IHT payable can be reduced if certain conditions are met. For example, if a beneficiary dies within 7 years of receiving their inheritance or if it is paid into a special trust fund set up specifically for this purpose.
There are a number of ways in which you can reduce your liability to IHT. You may be able to apply for a ‘deferred payment arrangement’ with HM Revenue and Customs (HMRC). This will allow you to spread the cost of paying IHT over several years. Alternatively, you could make a donation to charity which would reduce your taxable income.
Factors that increase your chance of having an inheritance tax bill on your death:
Here are some of the factors that can increase your chances of owing Inheritance Tax (IHT) on your death:
Your estate is worth more if you die unmarried
If you die without a spouse or civil partner, your estate will be taxed at a higher rate – 40%. If you have a spouse or civil partner, their share of your estate will be taxed at 15% instead.
Your estate is worth more if you die young
The younger you are when you die, the higher your estate value will be. For example, if you’re only 37 years old when you die, your estate will be taxed at 40%. If you’re over 55 years old, it’ll only be taxed at 25%.
Your heirs may have to pay IHT too
Even if none of your heirs are taxable in their own right (because they don’t have enough income), they may still end up having to pay IHT on the value of their inherited assets. This is because IHT is charged as an inheritance tax, even though it doesn’t affect the person who inherits the money directly.