A Beginners' Guide To Inheritance Tax

With increasing speculation and rising house prices, a lot of people are worrying about inheritance tax. It is important to know the facts and where you stand if you come to inherit from your loved ones.

What Is Inheritance Tax?

Put simply, inheritance tax is a tax on wealth (money, property, etc.) passed from one person to another during their lifetime or as part of their estate after their death. You only have to pay inheritance tax if the combined value of the assets being passed down are above a certain threshold (at the moment it is £325,000 or £650,000 for couples) and it is currently set at 40%. Tax must be paid 6 months after the death of the person, after this point it starts to generate interest.

What Does an Inheritance Include?

Your relative’s estate includes everything owned in their name or the share of anything that is owned jointly. This may also include gifts which they retain benefits from (such as a home given to a child but still lived in by the parent). Furthermore, assets held in some trusts which provide an income should also be included in the overall value of the estate.

However, this total value is used to pay off everything that the deceased person owed (such as any outstanding mortgages or loans or unpaid bills) and also includes funeral expenses. This means that the value that you will eventually inherit will be minus the debts your relative had not paid off upon their death.

Can I Avoid Inheritance Tax?

It is sometimes possible to find ways around the system. Money given to an individual is not counted for tax if the person survives for seven years after the date of which the gift was made. These gifts are known as 'potentially exempt transfers'. Money can also be put into a trust where the beneficiary is entitled to the trust fund at age 18 (this also counts as a potentially exempt transfer). However, gifts to most other types of trust will be treated as ‘chargeable lifetime transfers’. Up to the threshold, these will suffer no tax but amounts over are taxed at 20% with a further 20% payable if the person making the gift dies within seven years.

Some cash gifts may be exempt from tax regardless of the seven-year rule, including; wedding gifts of up to £5,000 to your children; wedding gifts of £2,500 to your grandchildren, and wedding gifts of £1,000 to anyone else. Also included are gifts of up to £3,000 a year; gifts of up to £250 each to any number of people each year; and gifts to charities.