Inheritance tax - the wages of sin
Inheritance tax is payable on a person’s estate after they have died. It is payable at 40% on all estates worth more than £325000. Estates worth less than this do not have to worry about paying any inheritance tax. The executors of a Will have the responsibility for ensuring inheritance tax is paid, even where none is owed they must prepare a tax return to demonstrate this.
Some estates which are worth more than the threshold can become exempt from inheritance tax if there is a Will that leaves instructions for the estate to be distributed in a certain way. Inheritance tax exemptions include:
Spouse/civil partner: An estate can usually be left to the deceased’s spouse or civil partner with no liability for inheritance tax, as long the partner resides in the UK.
Charity: Gifts made to a charity, either in a Will or during someone’s lifetime, will be exempt from inheritance tax.
Lifetime transfers: Gifts made in the last seven years of someone’s life are classed as part of their estate for tax purposes, so if a person survives for seven years after giving a gift to someone it will be exempt.
Annual exemption: Up to £3000 per year, either as a lump sum or several smaller gifts, can be given away tax free.
Small Gifts: As many gifts of up to £250 can be given away to as many people as you like with no inheritance tax liability.
Wedding/civil partnership gifts: Anyone who is getting married or entering a civil partnership can receive tax free gifts up to a certain amount.
Inheritance tax must usually be paid within 6 months of the end of the month when the deceased died, after this HM Revenue and Customs will start charging interest.
The executors of any estate are responsible for valuing it and paying inheritance tax. This must be done in great detail to avoid problems with HMRC later on. The valuation of the estate must include all significant property – cars, houses, jewellery etc as well as all bank accounts, shares and any other financial interests and all transactions made in the last seven years of deceased’s life, which will be eligible for inheritance tax unless they fall into one of the categories listed above.
Being named as the executor of a Will is a serious responsibility, particularly when large amounts of money are involved. Around two thirds of estates in the UK are administered by professional solicitors, they will be able to take care of all aspects of probate, including inheritance tax calculations, and their fee can be taken from the estate.