What is Inheritance Tax?
Inheritance Tax is usually paid on an estate when somebody dies. It’s also sometimes payable on trusts or gifts made during someone’s lifetime. Most estates don’t have to pay Inheritance Tax because they’re valued at less than the threshold (£325K in 2012-13).
Who is responsible for paying Inheritance Tax?
Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceased’s estate.
The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax – but this is not common.
Valuing an estate to see if Inheritance Tax is due
To find out if Inheritance Tax is due on an estate, the estate must be valued. This will include all the assets in the estate – such as a house, possessions, money and investments – and deducting any debts the deceased may have owed, including household bills and funeral expenses.
An estate also includes the deceased’s share of any jointly owned assets and the value of any assets held in trust, as well as any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren’t exempt.
Deadline for paying Inheritance Tax
In most cases, you must pay Inheritance Tax within six months of the end of the month in which the deceased died. After this, interest will be charged on the amount outstanding.
You can pay in yearly installments over ten years if the value of the estate is tied up in property such as a house. The due dates are different if you’re paying Inheritance Tax on a trust.
THE first £325K of any legacy is tax-free. Beyond this, IHT can be levied at 40 per cent, taking a large bite out of a lifetime’s work.
However, making annual gifts to family or friends can reduce the potential for an IHT bill. Each person can give up to £3,000 per tax year, plus as many gifts as they like worth up to £250 to different individuals.
None of these will affect the £325K nil-rate band. You can still give away bigger sums, however if you die within seven years of making these gifts they can reduce the nil-rate band.
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