When someone dies and their estate has a value above a specified threshold, the tax chargeable on the estate is called Inheritance Tax. The threshold for the year 2014-15 is £325,000, and the rate is charged at 40 per cent. The amount owed is normally paid from funds from the estate of the deceased person by the personal representative or executor. Assets from the estate in the form of a Trust will be liable to Inheritance Tax, paid by Trustees. It is possible to minimise the amount of Inheritance Tax payable, if you take steps to plan.
Make a will
One of the initial steps to take is to make a will. This is to make sure that your estate is dealt with according to your wishes, rather than being dealt with by the law under intestacy rules. If you have a surviving spouse, it is possible that Inheritance Tax will be payable immediately, potentially causing financial worries for the surviving partner or spouse. If you don’t have a spouse or partner, it is still crucial to write a will or your estate may pass to your parents or siblings, which could increase their liability for Inheritance Tax.
You have an annual allowance of £3,000 that you can give away every year. This amount isn’t liable to Inheritance Tax. You can also give away amounts up to £250 to any number of people without paying anything, and this is the small gift exemption. If you give a gift of greater value than £3,000, it won’t be liable to Inheritance Tax as long as you survive for at least seven years after. This is potentially an exempt transfer, and there are other gifts that are exempt for parents, grandparents and also donations to charities.
It is possible to take out a ‘whole of life’ insurance policy so that there will be funds to pay the tax due on the estate. The policy is created to pay out a sum that will cover the amount due. The money isn’t liable to Inheritance Tax, and will be made available on death to pay the liability on the estate.
Although tax planning is advised, it is worth while checking whether Inheritance Tax will be due on the estate. Only amounts above the threshold are liable to Inheritance Tax, and if this sum isn’t used by your spouse or partner when they die, the threshold will increase to £650,000.
Want to learn more?
Subscribe to our newsletter to get accounting tips like this right to your inbox
About The Author
We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!