Inheritance Tax Advice & Information

Inheritance Tax

Previously known as ‘Estate Duty’, Inheritance Tax is essentially a death tax on the total sum of your Estate after deducing all the exceptions and legal allowances. Estate Duty was introduced in 1796 in order to help fund the war against Napoleon Bonaparte; in 1975 it was changed to ‘Capital Transfer Duty’ and since 1986, it has been called Inheritance Tax.

When a person dies, the current limit that can be held before Inheritance Tax applies is £325,000. If above that limit, the tax applies at the rate of 40%.

The total value of the estate is established after:

1. All the debts on the estate have been cleared
2. All funeral expenses are covered
3. All the probate expenses are covered

The person who has to resolve Inheritance Taxes and other matters of the estate is the executor. They would need to fill in the relevant tax forms and send them to HMRC. If there is IHT payable on the estate, this must be done prior to the distribution of the estate to the beneficiaries.

Since most individuals would prefer to retain as much of the estate as possible, and if the estate is worth more than the threshold, there are several options to either reduce or completely mitigate the tax burden.

If you are going to make use of any of the following exemptions, make sure to keep detailed records and documentation for HMRC may require to see them.

Exemptions and donations

Certain people and organisations can be monetarily gifted without being liable for Inheritance Tax. The exemptions apply whether you make the gift during your lifetime or as part of the will.

Exempt beneficiaries are defined as follows:

Spouses or civil partners, as long as they are domiciled in the UK (applicable only to current marriages or civil partnerships, not previous)

An eligible UK/EU charity (other specified countries included, check with HMRC for eligibility criteria)

Specific national institutions including the National Trust, museums and universities
UK political parties (the party has to have minimum two members in the House of Commons, or one member with the party having 150,000 votes or more)

Annual Allowance and when to use it

It could be a smart option to use your Annual Allowance, which under current tax laws gives you the option to reduce your estate and give away gifts of up to £3,000 a year, tax free. There are no stipulations on how you make the gift or who receives it. This way you can make tax savings equatable to £1,200 a year.

If you don’t use the £3,000 allowance (or part of it) within a year, it can be carried over once to the next year. The only caveat is that it expires if you don’t use it again that following year, and will be limited to only £3,000 again.

It is an important consideration when filling the probate form. For example, the total amount that an estate can be reduced in a two year period preceding death is £6,000 – for the value of the gift in the year of death, and the year before. This equates to savings of £2,400 on IHT.