Who has to Pay Inheritance Tax? – Well, that’s an important question for every UK official resident and non-resident who owns property in the UK. Even if you are a non-UK resident, but own a property in the UK, the inheritance tax law still applies to your estate too. When preparing a will for your estate, it’s important to understand everything about IHT – what it is, how it works, and ways to reduce it.
So, before proceeding further, let’s start with the basic information.
What is Inheritance Tax and How Much is it?
Inheritance Tax or IHT is basically a tax on the assets such as property, possessions, and money of a person who has died. In the UK, the rate of inheritance tax is 40%, which will be charged if the estates are worth over a specific tax-free threshold limit of £325,000.
Therefore, if the overall value of all the assets and estates combined is less than £325,000, then the tax comes under the nil rate band. Or, if the value is above the £325,000 threshold, then as per the British inheritance law, the tax rate charged will be 40%.
Note: Even if your total estate value is less than £325,000, you still need to report it and file for tax.
How to Value Your Estate?
Valuation of the estate after someone’s death can be complicated, so taking advice from a financial advisor before making any decisions is suggested.
For the valuation of all the assets, such as land, property, cash, money in the bank, vehicles, shares, jewelry, and insurance policy, one needs to list everything at the date of death. This is done to find out the exact value that needs to be checked for IHT deductions.
Then, from the total asset value, debts, and liabilities are deducted to find the amount that will be considered for inheritance tax.
HM Revenue and Customs can ask you to check the inheritance tax record for the past 20 years. So, it is better to keep all the records that are included in the agent’s valuation docs.
Debts and liabilities deductions include mortgages, outstanding credit card bills, funeral expenses, and more. These are important to reduce the chargeable estate value so you pay the minimum tax.
What’s Included in Estate and What’s Exempted?
- As defined earlier, the value of movable and immovable assets such as home(s), land, cash, bank deposits, vehicles, and jewelry are included in inheritance tax.
- In some cases, pension funds payments are also included in the IHT.
- The value of money or possessions you offer to near ones for the period of seven years prior to death is also included in IHT.
- The total value of the first £325,000 is tax-free, but the rate of inheritance tax of 40% will be charged for any amount above this value.
- There is no inheritance tax applicable if you leave property and possessions for your partner (husband, wife, or civil partner).
- The £325,000 limit is for all individuals residing in the UK or foreigners owning property in the UK, so if your partner (husband, wife, or civil partner) hasn’t used their full tax-free limit, then any remaining limit can be used by the living partner.
- In some cases, gifts up to £3000 are also exempted from the inheritance tax bracket. But, this is not applicable for all cases, depending on the time and how & when given.
- There is no inheritance tax on charities made by you from your estate. The British Inheritance Tax Law exempts the entire amount given to the charity. Moreover, if someone leaves 10% of their total estate value, then the applicable tax is reduced to 36%, which will be charged on the remaining estate value.
- For exemptions from IHT, taking legal advice is recommended. Because there are different sets of rules and regulations for all the exemptions, it is suggested to connect with a professional financial advisor first.
Note: Leaving property to children or grandchildren also gives you an additional tax-free exemption of £125,000. This rule also applies to the property given to adopted, foster, or step-children. But, there are numerous rules on it, so it’s better to go for legal advice beforehand for inheritance planning in the UK.
Who has to Pay Inheritance Tax? – Find Your Answer!
Firstly, it’s important for each one of you to prepare a will so that the process becomes easy for your loved ones after your death. Because a will can also help the executor pay the inheritance tax hassle-free. You can take help from expert financial advisors for will creation and inheritance planning in the UK.
Secondly, giving the answer to your question, the executor of the will pays the inheritance tax (if there’s a will). And, if the will is not there, then the proprietor of the estate is bound to make the payment for inheritance tax.
The amount for IHT can be paid by the value collected from selling the assets or from the cash from the estate itself. In some cases, life insurance policies are there in force to pay for the inheritance tax.
Note: Inheritance tax must be paid by your heirs by the end of the sixth month of your death.