Inheritance tax (IHT) is a tax that is levied on the estate of someone who has passed away, above a certain threshold It is a tax that is paid out of the deceased person’s estate before the remaining assets are distributed to the beneficiaries In the UK, inheritance tax is currently set at 40% on estates worth over £325,000, with some exemptions and allowances available.
Understanding how inheritance tax works and how to pay it can be a daunting task for many people In this article, we will provide a comprehensive guide to paying IHT, including an overview of the rules and regulations, as well as tips on how to minimize the amount of tax owed.
Who has to pay inheritance tax?
Inheritance tax is typically paid by the executor of the deceased person’s estate, although in some cases it may be paid by the beneficiaries instead The executor is responsible for valuing the estate, calculating the amount of tax due, and making the necessary arrangements to pay it.
If the estate is worth less than the threshold of £325,000, no inheritance tax is due However, if the estate is worth more than this amount, tax is payable on the amount that exceeds the threshold For example, if an estate is worth £400,000, inheritance tax would be payable on £75,000 (the amount over the £325,000 threshold).
Inheritance tax allowances and exemptions
There are several allowances and exemptions available that can help to reduce the amount of inheritance tax payable The most common allowances include the nil-rate band, which is currently set at £325,000, and the residence nil-rate band, which can provide an additional allowance of up to £175,000 for estates that include a main residence.
In addition to these allowances, there are also a number of exemptions available for certain types of assets For example, gifts made to a spouse or civil partner are usually exempt from inheritance tax, as are gifts to qualifying charities and political parties Gifts made more than seven years before the death of the donor are also generally exempt from tax.
How to pay inheritance tax
Once the value of the estate has been assessed and the amount of tax due has been calculated, it is important to make arrangements to pay the tax as soon as possible paying iht. Inheritance tax is typically due within six months of the end of the month in which the deceased person passed away, although it is possible to pay the tax in instalments over a period of up to 10 years.
The executor of the estate is usually responsible for making the necessary arrangements to pay the tax This may involve selling assets from the estate in order to raise the necessary funds, or taking out a loan to cover the cost of the tax In some cases, it may be possible to pay the tax directly from the deceased person’s bank account, if there are sufficient funds available.
If the tax is not paid on time, HM Revenue and Customs (HMRC) may charge interest on the amount owed, as well as penalties for late payment It is therefore important to ensure that the tax is paid promptly to avoid incurring any additional charges.
Minimizing inheritance tax
There are several strategies that can be used to help minimize the amount of inheritance tax payable on an estate One common approach is to make gifts to beneficiaries during the donor’s lifetime, in order to reduce the value of the estate that is subject to tax.
Gifts made more than seven years before the donor’s death are usually exempt from inheritance tax, so this can be an effective way to transfer assets to beneficiaries without incurring tax However, it is important to be aware that there are strict rules around gift-giving, and gifts made with the intention of avoiding tax may be subject to anti-avoidance provisions.
Another common strategy for minimizing inheritance tax is to set up a trust to hold assets on behalf of beneficiaries Trusts can be used to protect assets from tax, as well as to control how and when they are distributed to beneficiaries However, setting up a trust can be a complex and costly process, so it is important to seek advice from a professional advisor before proceeding.
In conclusion, paying inheritance tax can be a complex and stressful process, but with careful planning and advice from a professional advisor, it is possible to minimize the amount of tax owed and ensure that the estate is distributed in accordance with the deceased person’s wishes By understanding the rules and regulations around inheritance tax, and taking advantage of the allowances and exemptions available, it is possible to reduce the financial burden of tax and provide for future generations.