Probate – Inheritance Tax
Inheritance tax is what is known as a transfer tax in that it is basically a transaction fee that is imposed by the state when the title of the estate of a deceased person passes to the executor of their Will. Inheritance tax acted to replace the Capital Transfer Tax in 1986.
The jump from not being eligible to pay any inheritance tax to being fully eligible is steep. All estates (the total value of a person’s money, investments, property or possessions) that have a net value of less than £325,000 are completely exempt from having to make any payments, while anything over that amount is taxed at a rate of 40%. As we shall see below there are a wide range of methods that can be used to avoid paying inheritance tax and as such, it only contributes around 0.8% of total government income on an annual basis.
Inheritance tax is levied upon the estate of the deceased person. The estate principally includes all of the assets that are owned by the deceased, such as investments, property, money and priceless antiques and heirlooms. The estate also consists of any gifts that were made to the deceased in the 7 years preceding their death. There may be other assets that are not directly owned by the deceased but will be directly affected by their death such as the interest payments on trusts.
There are a number of possible deductions that can be made to the amount of inheritance tax that an individual estate will owe. If there are assets that are going to be left to a charity that is registered in the UK, some forms of farmland and business assets or as donations to political parties, they will be subject to deductions. The same applies to a number of gifts such as those that total under £3,000 in a single year, £250 to separate individuals or gifts made as part of a marriage or civil partnership.
As was mentioned above, there are a number of legal ways in which to minimise or completely avoid paying inheritance tax in the UK. If the deceased has made gifts to another individual, these are known as ‘potentially exempt’ due to the fact that they become exempt if the giver dies more than 7 years after the gifts are given. Placing assets into trust finds is also another legal way of minimising inheritance tax, as is giving to charities and the selling of the property to certain forms of equity release deals.
Inheritance tax is one of the more loathed forms of tax in the UK. Many people object to it on the grounds that it will be very unlikely that a person who has built up an estate of over £325,000 will not have been paying tax for the majority of their life anyway, only to then have a sizable chunk (40%) removed from their family when they die. TO many this view of inheritance tax sees it as a ‘death tax’ and not at all morally justified.