A tax is imposed on a person who
inherits assets from someone who is deceased. This tax is called
inheritance tax (IHT). To put it simply, this is the tax on the money
and/or possessions you leave behind in the event that you die.
Sometimes, it is also payable on trusts or gifts made during your
lifetime. The tax is payable at 40% on the amount over this threshold
or 36% if the estate would qualify for a reduced rate. A certain
amount may also be passed on tax-free which is also known as the 'nil
rate band'.
An inheritance tax must be paid if the
value of the deceased's estate exceeds the Inheritance Tax threshold
of £325,000
in the 2013-14 tax year. It must also be paid within six months from
the end of the month in which the deceased died. If the executor
fails to pay, an interest will be charged on the amount outstanding.
Also, you may pay in yearly installment of up to ten years if the
value of the estate is tied up in property (ex. A house). If your
estate amounts to £500,000,
this would equate to a tax bill of £75,000.
If
you are married, you can combine both your inheritance tax thresholds
with your partner. Your thresholds will double and this may be left
to beneficiaries tax-free.
There
are ways to reduce your inheritance tax bill. One of the most common
things to do is reducing the value of your estate
before you death – or as you get older. Gifting is also one way of
reducing your estate's value. You have to keep in mind though that
any gift, whether it may be cash or asset, is free from inheritance
tax if you live for at least seven years from the date of the gift.
There are certain investments that are exempt from inheritance tax
after just two years. These are relatively high risk and are not
suited to everyone.
