Our quick guide explains what Inheritance Tax (IHT) is and some of the ways you can reduce this.
What is IHT?
IHT is a tax on the estate of someone who has died. Each person has a tax-free allowance or ‘nil rate band’ on their estate; this is currently £325,000. In 2017, each person will get an additional £100,000 (rising to £175,000 by 2020-21) tax-free allowance to use against the value of their home.
Who’s responsible for paying the tax?
If there is a Will, the executor will arrange to pay this tax. If there isn’t a Will, it’s the administrator of the estate who does this.
Not all individuals undertaking the task realise that they can be held personally responsible for any mistakes in the management and distribution of a deceased person's estate. Both professional and non-professional Executors are subject to a statutory ‘duty of care’ under the Trustee Act of 2000, meaning they must act in the best interests of the estate and beneficiaries. Consequently, they can be held financially and legally liable for any mistakes made in handling the deceased's assets.
When is the tax paid?
IHT is normally paid within six months after the person’s death. If the tax is not paid within six months, HMRC will start charging interest.
Is anything exempt from the tax?
Some gifts and property are exempt from IHT. If the deceased gave a gift in the seven years before they died, that gift is counted as part of the estate and likely to incur IHT.
Can I reduce the amount of tax paid?
Trying to reduce how much IHT is due on an estate is complicated. However, in short, you can reduce how much tax is paid by:
• Leaving your estate to your spouse or civil partner
• Paying into a pension instead of a savings account
• Regularly giving away up to £3,000 a year in gifts
• Putting your assets into a trust for your heirs
• Leaving a legacy to charity
Are there any other taxes my heirs will have to pay on their inheritance?
Your estate is only distributed after debts (if any) and IHT are paid but your heirs may incur other types of tax, depending on what they inherit:
• Income Tax - if what they inherit produces a regular income (e.g. share dividends or rent from a property), this is subject to Income Tax
• Capital Gains Tax - if they sell their inheritance (e.g. property) for more money than what it was worth when you passed away, the profit they made on the sale is subject to Capital Gains Tax.
How can Kings Court Trust help?
When it comes to estate administration, we can handle everything you can think of (and all the things you might not have considered). From dealing with IHT and shares to pet re-homing, you’ll find we’ve got everything in place to take care of your specific needs.
We’ve helped thousands of families receive their inheritance from estates big and small and our specialist tax and legal teams can advise on any situation. Call us on 0300 303 9000 or visit kctrust.co.uk for more information.