Inheritance tax is a toll the UK government levies on deceased estates within its ambit. An executor, or another responsible person is legally obliged to make a full and honest account. Should they fail to do so, and the government is out of pocket then it could hold them personally responsible. If you find yourself in the role of executor, it’s important to know how to calculate UK inheritance tax accurately.
A Deceased Person’s Estate for Purposes of Inheritance Tax
A deceased person’s estate comprises all their possessions at the time of their death. However, flat rate estate duty may not apply to all of them depending on their nature and value. There may no inheritance tax due at all provided:
1… The value of the estate, as calculated under guidelines is below the £325,000 threshold.
2… Anything above that value passes to the spouse, civil partner, a charity or a community amateur sports club.
However, it’s still necessary to report the estate to the HM Revenue and Customs. This is why you need to know how to calculate UK inheritance tax, regardless of the value of the estate.
It Helps to Know How to Calculate UK Inheritance Tax
The rate of inheritance tax is 40%. However, this is not across the board. You only pay it on the amount over the threshold. Let’s say for example the value of an estate is £500,000.
1… The above-threshold amount is therefore £175,000
2… The estate duty is thus £70,000 (40% of £175,000)
There are however several ways you may be able to avoid the above-threshold inheritance tax legally.
GIFTS TO CHILDREN
If you give your home away to your natural, foster, or step child or children – and you survive another seven years – your inheritance tax threshold could increase to £500,000.
PARTNER THRESHOLD SHARING
Married partners, and those in civil partnerships have ‘virtual thresholds’ of their combined value. If the first of them dies without using all of theirs, then the balance credits to the other.
OTHER WAYS TO REDUCE YOUR LIABILITY
There are other ways to reduce your debt, although these are beyond the scope of a general introduction to how to calculate UK inheritance tax . You may wish to seek specialist advice if you need assistance in valuing an estate for probate purposes.
Paying Your Dues Across to HM Revenue and Customs
The UK tax department has its customers cornered on this one. An executor needs an inheritance tax clearance before they get can past the first base of winding up an estate.
1… The tax is normally paid out of the estate. However, if the funds are locked up in assets, the tax authority is usually open to negotiation. Under some circumstances the executor, or a third party may advance the funds.
2… Beneficiaries of the estate do not normally pay tax on their inheritance. They may however have additional taxes as a result, for example rental from property or income from investments.
3… Gifts given to people prior to passing – including property – may incur inheritance tax if they total more than £325,000. But this is only the case if the person making the gift dies within seven years after the donation.
Dog Tax Gatherers in Search of Puppies (1796) I Cruikshank via British Museum
But There Is More to Passing on a Home Than That
A home is often the largest asset in any estate. It is therefore unsurprising homes receive special attention at HM Revenue and Customs. This is another reason why knowing to how to calculate UK inheritance tax can save you money legally.
PASSING A HOME TO A PARTNER
Married couples, and those in civil partnerships can pass their homes / shares in them to their partners when they die. In this case, there is no inheritance tax to pay on that portion of their estate (although there usually are legalities to pay).
PASSING YOUR HOME TO YOUR KIDS
There are also ways to reduce your tax obligation by leaving your home to your natural child / children, including adopted, foster or step kids.
1… Your threshold could increase to £500,000
2… But only if your estate is worth less than £2 million
PASSING A HOME TO A THIRD PARTY
However, if you leave your home to a third party in your will, then it remains part of your estate for tax purposes.
GIVING YOUR HOME AWAY BEFORE YOU DIE
There is nothing to stop you giving your home away. Although someone still has to pay to register ownership, and perhaps capital gains tax too especially if you die within 7 years. But do remember if you want to stay on, you will need to pay rent and your share of the bills.
Where to Get More Advice on Valuation and Probate
Avery Associates assist estate executors with probate advice, insurance valuations, and complete home clearances. We are active throughout the South East of England. Follow one of these links to your nearest service point. We assure you of our best attention at all times.
More Information On Probate and Valuation