Welcome to DLS Solicitors’ guide on how inheritance tax in the UK is calculated. Whether you are planning your estate, an executor of a will, or simply curious, understanding the basics of inheritance tax can provide clarity and aid in efficient financial planning. This comprehensive guide aims to demystify the process in a professional yet accessible manner.
What is Inheritance Tax?
Inheritance tax (IHT) in the UK is a tax on the estate (the property, money, and possessions) of someone who has passed away. How much IHT needs to be paid can depend on the value of the estate and the beneficiaries’ relation to the deceased.
Thresholds and Rates
The standard threshold for IHT is £325,000, which is known as the ‘nil-rate band.’ Estates valued below this amount are not subject to IHT. For estates valued above this threshold, the standard tax rate is 40%. However, there are various reliefs and exemptions that can significantly affect the amount of tax payable.
Residence Nil-Rate Band (RNRB)
Introduced in April 2017, the RNRB is an additional threshold for individuals who leave their residence to direct descendants. This is £175,000 for the 2020/21 tax year, making it possible for an estate to have a total nil-rate band of £500,000 per individual. For married couples and civil partners, unused thresholds can be transferred, potentially allowing a combined threshold of up to £1 million.
Calculating the Taxable Estate
To calculate the taxable estate, you must first determine the total value of the estate. This includes:
- Money in bank accounts
- Property and land
- Investments
- Insurance payouts
- Personal possessions
From this total, deduct any debts the deceased owed at the time of their death, including mortgages and loans. The value of gifts made within seven years of death that exceed the annual exemption limit must also be considered.
Exemptions and Reliefs
Several exemptions can reduce the value of the taxable estate:
- Spousal exemption: Assets passed to a spouse or civil partner are exempt from IHT.
- Charity exemption: Any portion of the estate left to a registered charity is exempt.
- Annual gift exemption: Gifts up to £3,000 per year can be made without being added back into the estate for IHT purposes.
Other reliefs, such as Business Relief, can also apply, potentially reducing the taxable value of business-related assets.
Paying Inheritance Tax
IHT is typically paid by the executor of the will or the administrator of the estate, using funds from the estate itself. IHT must be paid within six months from the end of the month in which the death occurred. If the tax is not paid within this timeframe, HMRC may charge interest on the amount owed.
Conclusion
Calculating inheritance tax can be complex, involving various thresholds, exemptions, and reliefs. Each estate is unique, and professional advice can be invaluable in navigating the specifics of your situation. At DLS Solicitors, we are committed to providing expert guidance to help you manage the IHT process efficiently and effectively.
For more detailed advice tailored to your circumstances, please contact us. Our team of experienced solicitors is here to assist with every aspect of inheritance planning and tax.
