If, as Benjamin Franklin said, ‘Nothing is certain except death and taxes’. Then it’s important to have an understanding of the latter and how the former (or more specifically, inheritance) can affect you financially.
What is Inheritance Tax?
Inheritance Tax is a tax on the property, money and possessions (the ‘estate’) of someone who’s died.
Normally, there’s no Inheritance Tax to pay if your estate is below £325,000, or if anything above that threshold is left to your spouse, civil partner, charity or community amateur sports club. However, even it your estate is below the threshold, you still need to report its value to HMRC.
The threshold increases to £500,000 if you leave your home to your children (this includes foster, adopted or step-children), and if you’re married or in a civil partnership, unused threshold can be added to your partner’s allowance when you die, meaning your children could have a threshold of £1million.
The standard Inheritance Tax rate is 40%, payable on the part of your estate that is above £325,000. So for example, if your estate is worth £600,000 and your tax-free allowance is £325,000, then Inheritance Tax will be charged at 40% on £275,000.
How do I value an estate?
To value an estate of a deceased person, you need to complete three main tasks:
- – Identify assets and debts: such as savings, investments, mortgages and loans
Assets can also be classified as property, household items and personal effects. Debits will also include utility bills and money owed on credit cards.
- – Estimate the total value of the estate.
Work out the value of the deceased’s assets – the worth of their personal effects, any gifts they made (eg money or valuable items) in the 7 years before they died, and the value of any trusts where the deceased may have had a beneficial interest.
- – Report details of the estate
You’ll need to make sure you send the correct forms when you report the details of an estate – you can find out on the HMRC website which ones you need.
Be aware
Even if no Inheritance Tax is due, there are several reasons that you may still need to send full details of the estate:
- – If the person gave away over £250,000 in the 7 years before they died
- – If the deceased gave gifts that they continued to benefit from in the 7 years before they died – gifts can be classified as money, household goods, property or land, stocks and shares, unlisted shares held for two years before your death.
- – If the deceased had foreign assets worth more than £100,000
- – If there was a life insurance policy paid out to anyone other than a spouse or civil partner
- – If the person was permanently living outside of the UK when they died (but had previously lived in the UK)
Dealing with financial matters can be overwhelming when you’re also dealing with a loss and it can be easy to make mistakes when you’re grieving, so do get in touch to find out if we can help with some of the tasks you need to complete – we’re here to help our clients in whatever way we can.