IHT, which stands for Inheritance Tax, is a type of tax on possessions or money you have left behind once you pass away, as well as on a few gifts you have made in the last years of your life. If you’re wondering what is a probate and finding it hard to get your head around inheritance tax, then read on here.
Some of your assets you are able to pass on tax-free, known as the “nil rate band” or “tax-free allowance”. If you are passing your assets to a civil partner or your spouse, then there are no inheritance taxes due. Just about all of the same HMRC forms which are a requirement when inheritance taxes are due will still need to be filled out and filed, excepting there are no tax requirements that will have to be paid.
For our current tax-year, the tax-free IHT allowance is set at £325,000. It is unlikely that this amount will increase for a number of years to come.
There will also be residence “allowance” in addition to a standard “nil rate band” which applies when the deceased has left her or his interest in property which was at a certain point their main residence (yet not always necessary at the time of the persons death) to 1 or more “direct descendants”. A direct descendent can include biological children, stepchildren, adopted children, foster children, along with grandchildren.
A residence “nil rate band” will be a lower of (1) of net value of interest in a residence along with (2) a maximum “nil rate band”. Maximum “nil rate band: will start at £100,000 for each person from the month of April 2017, and will increase by £25,000 every year from here, up to a figure of £175,000 by 2020/21.
Inheritance Tax Rates and Thresholds
If when you die you were not in either a civil-partnership or married.
If you die single and your estate has a worth that exceeds £325,000, which will include money, investments, property, after the deduction of expenses and debts like your funeral costs, IHT at 40% will be payable on the overall value of the estate if it is above £325,000.
If when you die you are in a civil partnership or married.
Civil partners and married couples are permitted to pass along their assets and possessions to the other partner tax-free. Since October 2007, surviving partners are now permitted to make use of both these tax-free allowances (to an extent that 1 was not used at the 1st death).
Making a Gift Over Your Lifetime
IHT can also be payable when it comes to gifts you have made over your lifetime, particularly when you pass away within a 7-year period of making such a gift, over and above those that pass under the estate at your death. There are rules that are detailed on whether gifts are or not:
- In themselves tax-free, when these gifts were made.
- Tax-free due to the timing of a gift.
- Or taxable themselves, yet tax might not or might be due when the gift was made.
Who Pays for an Inheritance Tax Bill?
IHT that is due on the estate once you pass on is typically paid out of your estate. Your estate basically consists of everything that you own, after subtracting debts like a mortgage along with expenses which can include your funeral.
People that received gifts directly from you may need to pay IHT yet only when you gave over £325,000 and you have passed away within a period of 7 years.
If they refuse to pay or cannot pay, the due amount will then be taken from your estate.
Planning for Your Death
Death might not be pleasant to discuss or think about, but some thought can assist your friends, spouse and relatives to handle practicalities over a time that is difficult.
It is even more important that you have made plans when people are reliant on you. Whether you are an important employee, business owner or have children.
A key part of planning for when you die is to make a Will. This is very important for couples that are unmarried, especially if you have kids together or own joint property.
There are also a few practical steps you are able to take now to assist the ones you are leaving behind. This can include contingency plans for businesses, life insurance, making online accounts and passwords available.