When a person dies and someone else inherits their estate, a tax needs to be paid on the estate, known as inheritance tax. If you are planning to Will, then you must know how much inheritance tax should be paid. Before getting into how much inheritance tax is to be paid, it is important to know who will pay the tax.
When you make a Will, you will name an executor for the estate. The executor has to pay the tax using the funds in the estate. If a person dies without making a Will, then the administrator of the estate arranges to pay the tax. If required, any of the assets in the estate can be sold to pay the tax.
How much is the inheritance tax?
The rules relating to inheritance tax can be complex, but the main points to note are:
You don’t have to pay any inheritance tax under any of the following scenarios:
- If the value of your estate is below £325,000, or
- If you leave everything above the threshold value of £325,000 to your spouse or your civil partner, or
- If you leave everything above the threshold to a charity or any other such beneficiary who is exempted.
In all other cases, then the value of the estate above the threshold level would be taxed. The tax rate is 40%. Let us assume your estate value is £500,000. The value above the threshold value is £500,000 – £325,000 = £175,000. You will need an inheritance tax of 40% on £175,000, which is £70,000.
In certain situations, and subject to certain conditions being met, your tax-free threshold may be increased through the use of the main residence nil rate band. The threshold value will increase to £500,000 if you have given your home to your children or grandchildren.
Planning for inheritance tax
You need to plan for paying inheritance tax at the time of making your Will. For this, you need to value your estate.
- List out all the assets in your ownership, including property that you own, all possessions, and money.
- Deduct all liabilities like debts from the asset list.
- You will now arrive at the value of your estate. Find out if it exceeds the threshold value, and then you will get an idea of the tax you need to pay.
Inheritance tax calculation and planning is often overlooked when people make their Wills, but with careful planning it is possible to significantly reduce your inheritance tax liability, if not mitigate it completely. If you are concerned that your estate may be liable to pay inheritance tax, speak to us today.