Inheritance tax (IHT for short) is the tax charged on the money and possessions that you leave behind when your pass away, and on some kinds of gifts you make in your last years before you die. Nonetheless, there’s still a certain amount of assets that can be passed on tax-free – through the “nil rate band” or the “tax free allowance” clauses.
When you pass your assets to your civil partner or spouse, no inheritance tax is payable at all. Still, almost all the same HMRC forms needed when inheritance tax is payable will need to be completed and filed, only that no tax has to be paid. Currently, the tax-free IHT allowance stands at £325,000, and is unlikely to be increased in the coming several years. Many solicitors offer a fixed fee probate service, making the process easier for you.
In additional to the standard nil rate band, there’s also a residence “allowance”, which applies where the deceased leaves their interest on a property that has, at some point in their life, been a primary residence (not necessarily at the time of death) to one or more direct descendants. A direct descendant can be the children, grandchildren, stepchildren, foster children, and adopted children.
The residence nil rate band covers two aspects: (1) the total net value of the interest on the property and (2) the maximum nil rate band. Since April 2017, the maximum nil rate band now starts at £100,000 per individual, and usually increases by £25,000 for every year after that, up to £175,000 by 2020 or 2021.
Inheritance Tax Rates and Thresholds
For those who are married or in a civil partnership
Civil partners and married couples are allowed to pass on their assets and possessions to each other tax free. The surviving partner is allowed to use both of the tax-free allowances, provided that one of them wasn’t used at the first death. This has been in effect since October 2007.
Making a gift during your lifetime
IHT might also be payable on gifts that you make during your lifetime. This especially true if you die within seven years from the date you make the gift, along with those that are passed under your property at your death. Keep in mind that there are rules detailing whether or not the gifts are:
• Tax free due to the timing of the gift
• In themselves are tax free when they’re made
• Or are taxable by themselves, and the tax may or may not be due to the time the gift is made
Who Pays the Inheritance Tax Bill?
Simply put, the IHT that’s payable on your estate when you pass away is usually paid from your estate. Your estate is basically made up of everything you own, minus your different debts like your mortgage and other expenses like funeral or hospital expenses.
The people you gifted may have to pay up the IHT if you gave them possessions or properties worth more than £325,000 and you died within 7 years of gifting them. If they won’t or cannot pay, the amount is charged on your estate.
Planning for Your Death
Many people just don’t want to think about death. Nonetheless, a little thought and careful planning can help spouses, relatives, and friends to deal with the different practicalities that arise during the difficult time when you’re gone.
It’s especially important to have plans in place if there are people who rely on you; whether it’s your children, grandchildren, or you’re a business owner and have a key employee. One of the central aspects of planning for death is making a will. It is especially critical for unmarried couples, especially when they jointly own property or have children together.
There are also a number of practical steps that can go a long way in helping those you leave behind. These include contingency planning for business, life insurance, and making your online accounts and passwords available.