When someone passes away and leaves assets to their family or loved ones, it can be a lengthy and messy process as there can be lots to sort out. And whilst they’re busy grieving and mourning, the last thing they want is HM Revenue & Customs (HMRC) breathing down their neck for potential Inheritance Tax (IHT) payouts.
But many people are confused as to what it is and often turn to the internet for help. That’s why experts at income tax.co.uk have conducted research to find the 10 most searched inheritance queries in the UK.
It’s no surprise that the questions encompass all things Inheritance Tax-related. Therefore, we’ve gone ahead and answered these questions for you so that you have a one-stop shop for everything related to Inheritance Tax.
Let’s dive right in!
What are the 10 most searched for Inheritance Tax queries in the UK?
The top five most-searched Inheritance Tax queries are: “How much is Inheritance Tax?”, “What is Inheritance Tax?”, “How to avoid Inheritance Tax”, “What is the Inheritance Tax threshold?” and “When do you pay Inheritance Tax?”.
Rounding out the rest of the 10 questions are: “Who pays Inheritance Tax?”, “Does Norway have Inheritance Tax?”, “How does Inheritance Tax work?”, “What is the 7-year rule in Inheritance Tax?” and “Do you pay Capital Gains Tax on inherited property?”.
How Much is Inheritance Tax?
Inheritance Tax is currently at 40%. Most people will only have to pay Inheritance Tax on part of their estate, whereas some people may not have to pay Inheritance Tax at all. But what factors determine how much you pay and when you pay? We will be answering this question further down the article.
What is Inheritance Tax?
When someone passes away, their ‘estate’ is usually passed down to someone – it could be their spouse, child, grandchild, or next of kin. An estate includes all assets that the deceased owned. This includes cash in the bank, investments, businesses, vehicles, properties, and life insurance payouts, minus any debts.
Depending on the size of the estate, the heir or administrator may have to pay tax on it. This tax is known as Inheritance Tax and is currently at 40%.
How to Avoid Inheritance Tax?
When it comes to Inheritance Tax, with appropriate planning, there are a few ways to take advantage of tax reliefs and exemptions to ensure the IHT bill is as low as possible. Instead of waiting until death to pass on the estate, you can begin making arrangements whilst you are alive.
Firstly, renew your will to ensure it is up-to-date. A will that is holding assets in a trust could result in losing out on the Inheritance Tax threshold, also known as the nil-rate band, so make sure this is not the case.
There is an annual exemption you can take advantage of. The annual exemption is where you can give tax-free gifts of up to £3,000 per tax year. You can also carry it forward for one year and use it then, giving you up to £6,000 in a single year.
You also have the ability to give away gifts from your income. Inheritance Tax is a tax on assets, not income. Therefore if you have a pension or another source of income, you can give it away as tax-free gifts. The only caveat is that the gifts cannot affect your lifestyle. Also, each tax year, you are able to give £250 per person as a form of a gift. Say you have 12 grandchildren, you can give them £250 each completely tax-free.
Wedding gifts are also tax-free. If a family member or simply someone you know is getting married, you are able to give them a gift. The amount you can give will depend on their relationship with you – £5,000 to your son/daughter, £2,500 to your grandchild, and £1,000 to anyone else.
Lastly, we have gifts to political parties and charities. These are all free from Inheritance Tax, ensuring you can give your money to a good cause without the taxman intervening.
What is the Inheritance Tax Threshold?
For the current 2022/23 tax year, HMRC has allowed everyone a tax-free inheritance allowance of £325,000. This means that if someone’s estate has a value of up to £325,000, no Inheritance Tax will have to be paid on it. The 40% Inheritance Tax only applies to estates that exceed this threshold.
However, just like with Income Tax or National Insurance thresholds, you will only pay Inheritance Tax on the value of an estate above the threshold. For instance, if you leave behind an estate worth a total of £450,000, the Inheritance Tax bill will only be £50,000. This is because you will pay tax on the difference between £450,000 and £325,000 (40% of £125,000).
This may seem like quite a lot of tax, but there is some good news. Since April 2017, HMRC has also given people a £175,000 property allowance if someone leaves a property to a direct descendant. Property allowance is in addition to your Inheritance Tax allowance, meaning that you can pass on up to £500,000 to a direct descendant completely tax-free (or £1,000,000 as a couple). In order for this to apply, the recipient has to be a direct descendant. The following people would satisfy that criteria:
- Children, grandchildren, or great-grandchildren and their spouses or civil partners
- Foster children
- Children under the guardianship of those passing on the estate
When do you pay Inheritance Tax?
To avoid incurring interest charges on the amount owed, Inheritance Tax has to be paid within six months of the person’s death. At the time of writing this article, HMRC has increased the interest rates on unpaid Inheritance Tax to 2.75%. These costs can certainly add up, especially if you have inherited a high-valued estate, therefore, if you want to ensure you don’t get charged more than necessary, your payment for the tax bill must be made before the end of the sixth month.
If you plan on selling the estate and using that money to pay off the Inheritance Tax, it is still wise to pay off someone of the tax within the first six months. This is because the procedure for selling an estate can take some time, and if it takes longer than six months, you don’t want to be charged interest on it. That’s why it’s a good idea to safeguard yourself by paying off as much of the Inheritance Tax as you can to limit your interest charges.
Who pays inheritance tax?
In the event that the deceased has left a will, usually, it’s the executor of the will who pays the Inheritance Tax. If there isn’t a will, the administrator of the estate – often a relative or the beneficiary – will arrange to pay the tax bill.
Typically, IHT is paid directly from the estate funds. However, if this isn’t possible, it is paid from the sale of the assets in the estate. In some cases, the deceased will have left some money over in order to pay the Inheritance Tax, either as cash or via their life insurance policy. If that is the case, then the executor of the will or the administrator of the estate won’t need to take any action.
Does Norway Have Inheritance Tax?
This question can seem like it’s random or out of the blue, and it may come as a surprise that so many people from the UK are asking this question. But there’s a reason behind it. Norway is one of the more recent countries to abolish the tax altogether. It joins a handful of countries in Europe and globally to get rid of IHT entirely. This was done to foster wealth creation amongst generations. On the flip side, UK inheritance tax rates are one of the highest in the world.
How does Inheritance Tax Work?
When a person has passed away, the total value of their estate is determined by HMRC. They will then charge a 40% tax on anything above the Inheritance Tax threshold of £325,000.
What is the 7 year rule in Inheritance Tax?
The seven year rule states that IHT will have to be paid on gifts if you live longer than seven years after giving them. On the other hand, gifts that are given less than seven years after passing are subject to IHT. It’s a good idea to keep a record of all gifts that are given, who they were given to, the relationship to them, the value of the gift, and when it was given. This will make it much easier for the person who is responsible for handling your estate to manage.
The amount you will be taxed depends on how many years ago the gift was given, also known as ‘Taper Relief’:
|Time between gift and death||Tax|
|0 – 3 years ago||40%|
|3 – 4 years ago||32%|
|4 – 5 years ago||24%|
|5 – 6 years ago||16%|
|6 – 7 years ago||8%|
|7+ years ago||0%|
Do you pay Capital Gains Tax on inherited property?
Yes, Capital Gains Tax can be applied to inherited property. Suppose that a person decides to sell the property that they have inherited. If the property is now worth more than it was when they inherited it, they will be charged Capital Gains Tax on the difference, minus the Capital Gains allowance of £12,300 (£6,150 for trusts) if it is applicable. The amount of Capital Gains Tax they will be charged will depend on what rate taxpayer they are – basic, higher, or additional.