Do I Have To Pay Inheritence Tax

Inheritance tax is paid on your estate when you die if your assets are worth over a certain amount. The majority of estates won't be large enough to incur the tax, but it is important to know about it and to factor it into your will and planning.

What is inheritance tax?

This tax is paid on the estate of someone who has died and it applies to their money, property and possessions. However, it doesn't apply automatically as everyone starts with a nil-rate band or allowance which is tax free. For the current tax year (2016-17), this is £325,000. This means that if your estate is worth less than this when you die you won't pay inheritance tax on it.

Passing on your estate

If you are married or in a civil partnership, you are legally entitled to pass on your estate to your spouse without incurring this tax. This means that the surviving spouse is able to inherit the estate in its entirety without inheritance tax to pay. It is also possible to transfer an unused portion of your tax-free allowance to your surviving spouse.

For example, if one partner dies with an estate worth less than £325,000 the other partner can take this allowance on top of their own. When combined it means that this person's estate will need to be worth more than £650,000 to incur the tax.

Increasing allowance

From April 2017, the IHT allowance is also rising and everyone will be entitled to an extra £100,000 tax free. This will then rise to an extra £175,000 in the 2020-21 tax year and be available to use against the value of your home. However, there is a caveat - the extra allowance only applies if you plan to leave your home to your children or your grandchildren.

Who pays inheritance tax if it is due?

IHT will typically be paid directly from estate funds or money that is raised by selling assets if there is no cash value in the estate. Often, people who anticipate the tax will arrange a life insurance policy which will cover the tax bill. The actual payment is typically made by the will executor if a will is in place. Without a will, the estate administrator will do it and the payment should take place within six months. When any debts and the tax is paid the administrator or executor will then distribute the remaining estate - if this applies - to the deceased's heirs.

How is IHT calculated?

Inheritance tax is levied at 40pc above the threshold. You can see a table of examples here..

Are there exemptions?

Yes - some properties and gifts are exempt. Gifts given by the deceased in the seven years before death also represents part of the estate and will be included for IHT calculations.

Can the amount of IHT be reduced?

This is a complicated area and requires specialist advice. However, there are routes to doing so, such as the partner transfer mentioned previously, gifting up to set limits, leaving a charity legacy, setting up a trust and paying savings directly into a pension.

Find out more

HMRC provides useful guidance on inheritance tax. It is advisable to seek advice from an Independent Financial Advisor when planning your will and its tax implications.