Inheritance Tax and How To Reduce It

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.