Investment planning, Protecting

Inheritance Tax: Planning, Paying and Penalties

2 August 2023

Inheriting assets from a loved one can be a bittersweet experience. On one hand, you may be feeling overwhelmed with sadness and grief. On the other hand, you may have received a significant amount of money or property that can help you in the future. However, it’s important to understand that with inheritance comes taxes, and it’s crucial to know when you need to pay them.

Inheritance tax is a tax on the estate of someone who has died, which is paid by the beneficiaries. The amount of inheritance tax depends on the value of the estate and the relationship between the deceased and the beneficiary.

When Do You Pay Inheritance Tax?

In the United Kingdom, you are taxed 40% on anything over the £325,000 threshold. For example, if your estate is worth £500,000 and your tax-free threshold is £325,000, the Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000). Inheritance Tax needs to paid six months after the person’s death – if this is not paid, HMRC will start charging interest until it is. This does not need to be paid in one lump sum, as some executors have the option of paying Inheritance Tax over a ten-year period.

If you are a beneficiary of an estate that is subject to inheritance tax, you may be wondering when you need to pay it. The answer is within 6 months of the date of the persons death, typically. It’s crucial to remember that the threshold may change in the future, so for the most up-to-date data, check the latest information from official sources or consult a legal or financial counsellor.

Who is Exempt from Inheritance Tax?

It’s important to note that not everyone is subject to inheritance tax – spouses, for example, are exempt from inheritance tax. Married couples and civil partners are entitled to the “spouse exemption”, allowing assets to be transferred tax-free between partners, regardless of their value. Furthermore, the surviving spouse can transfer the unused share of the nil-rate band, possibly tripling the tax-free level.

Certain lifetime gifts are exempt from IHT if you live for at least seven years after making the gift. Small presents up to £250, recurring gifts from income, and gifts for marriage or civil partnership are all examples of these gifts. Taking advantage of these exemptions can help you lower your taxable estate over time, and you can find this – and other benefits – by clicking here.

Establishing trusts can be an effective technique for estate planning. Trusts can help to safeguard assets, govern how and when they are dispersed, and potentially reduce IHT liabilities. There are various sorts of trusts accessible, each with its own set of advantages depending on your personal needs and goals.

How to Pay Inheritance Tax

If you are subject to inheritance tax, you may be wondering how to pay it. The first step is to determine the value of the estate and the tax rate in your state. You will then need to file an inheritance tax return and pay the tax owed. In some cases, you may be able to pay the tax in instalments. It’s crucial to work with a tax professional who can help you navigate the process and ensure that you are paying the correct amount of tax.

In the UK, Inheritance Tax (IHT) is typically paid by the executor or administrator of the deceased person’s estate. The executor or administrator is responsible for completing Form IHT400, the Inheritance Tax return. This document includes the deceased’s assets, any gifts made during their lifetime, and other pertinent information required to calculate the Inheritance Tax due.

Once the estate’s value has been estimated and all required information has been acquired, the Inheritance Tax liability is computed using the current tax rates and exemptions. The regular rate of Inheritance Tax was 40% on the value of the estate beyond the IHT threshold (£325,000) as of the last update in September 2021. However, depending on the circumstances, some exemptions and reliefs may apply.

What Happens if You Don’t Pay Inheritance Tax?

If you fail to pay inheritance tax, you may face penalties and interest. In some cases, the state may place a lien on the estate, which can make it difficult to sell or transfer any assets. It’s crucial to pay inheritance tax on time to avoid these consequences.

Inheritance planning can be complex, with various legal and financial implications. Consulting with a solicitor or a financial advisor who specializes in estate planning can help you navigate through the intricacies of the process. They will ensure that your will is legally binding and can assist you in optimizing tax efficiencies.

How Inheritance Tax Works – Gov.UK (March 2023)

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