Inheritance tax is only levied on estates of certain sizes and according to HMRC, only four to five percent of estates in the UK pay IHT. For those it does affect though it can be a costly burden.
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IHT is levied on estates valued more than £325,000 when they are being passed on, usually to family or friends.
The current IHT rate is 40 percent but this is only charged on the parts of the estate above the threshold.
So, as an example, if the estate of a person who has died is valued at £400,000, 40 percent will be deducted from £75,000.
There are ways to reduce this bill however which involve family set ups and who eventually receives the assets.
The £325,000 threshold is also known as the “nil rate band” and there can be an additional element known as the “residence nil rate band” (RNRB).
The RNRB can increase a person’s allowance before IHT is levied so long as the home in the estate (or part of it) is given to children or grandchildren.
This can include step-children, adopted children or foster children.
For the current tax year, it’s possible to add a RNRB of £175,000 to the total allowance, meaning that a total estate can be as high as £500,000 before any IHT is due.
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The rules about how an IHT bill is paid can be complicated but generally an executor will take charge of the admin, so long as there is a clear bill in place.
If there is no will, the administrator of the estate will be responsible for the bill.
According to the Money Advice Service however, in practice most IHT is paid though the Direct Payment Scheme (DPS).
This means that if the person who died had money in a bank (or building society), the person dealing with the estate can ask for all or some of the IHT bill to be paid directly from said account.
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The estate in question is then only distributed after any debts and IHT are paid.
However, for some families, this may not be the only tax to deal with when an estate gets passed over.
The people receiving the assets may need to pay the following taxes in certain circumstances:
- Income tax may need to be paid if what they’re inheriting produces a regular income (examples being share dividends or rent from property)
- Capital gains tax could be levied if the inheritors sell what they’ve been given (such as a property) for more money than what it was worth when the person died. The actual amount due will depend on the receivers income tax brackets
Due to the complicated nature of IHT, it is usually advisable to seek professional advice but this can be costly.
The government’s website has full details available on IHT rules and can provide guidance on how to handle estate matters.
Additionally, impartial guidance can be sought from the likes of the Money Advice Service and Citizens Advice.
It should be remembered that so long as an estate’s value is less than £325,000, no IHT will be due at all.
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