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A guide to inheritance tax

A guide to inheritance tax

Dealing with inheritance tax can be a confusing and overwhelming affair. Historically, it has been a tax liability that affected only a small proportion of people due to the value of most estates falling below the threshold. However, with rising house prices inflating this figure, more and more people are finding themselves having to factor in inheritance tax when dealing with a loved one's estate.

To help you understand the important things you need to be aware of we have provided answers to the key questions below in our simple guide to inheritance tax.

Please note: Paragon does not currently provide inheritance tax planning services and this guide is for information only. For further information on inheritance tax, please visit the gov.uk website.

What is inheritance tax?

Inheritance tax is a tax paid on the assets left when someone dies. You will not need to pay inheritance tax if the value of the estate is less than £325,000, or if you leave everything to a spouse or civil partner, a charity or a community amateur sports club.

However, you will still need to report it to HMRC even if the estate’s value is below the threshold.

The introduction of the new “main residence” band adds an additional allowance of £125,000 for the 2018/2019 tax year, potentially increasing the threshold up to £450,000.

If you are married or in a civil partnership and your estate is lower in value than the threshold, any additional threshold can be added to your partners when you die. This could leave them with a threshold of up to £900,000.

The new main residence band

In July’s 2015 Summer Budget, former Chancellor of the Exchequer George Osborne decided to remove the duty when parents or grandparents pass on a home worth up to £1 million (£500,000 for singles) and this will be gradually phased in until April 2020.

The current allowance on inheritance tax remains unchanged, no inheritance tax is charged on the first £325,000 of someone’s estate, this is worked out per person, so a couple could leave a home worth £650,000 without it attracting inheritance tax.

Anything above the threshold of £325,000 (or £650,000 per couple) will be subject to the standard inheritance tax rate of 40%. This is only charged on the part of the estate which is above the threshold.

New for the 2017/2018 tax year was the addition of the main residence allowance. It is only valid on a main residence and where the recipient of a home is a direct descendant, this is classed as children, step-children and grandchildren. For this year the allowance will start at £125,000 and will rise by £25,000 each year until 2020.

So currently the maximum that can be passed on tax free is £900,000 for married couples or those in a civil partnership or £450,000 for an individual, this is made up of the £325,000 plus the £125,000 main residence allowance.

In 2020, the tax-free amount will go up to £1 million for couples and £500,000 for singles as the main residence allowance rises.

Reliefs and exemptions

Individuals in certain job roles such as armed forces, police, paramedics and firefighters are exempt from paying inheritance tax if they die in active service. Individuals can also be exempt if an injury sustained during active service has hastened their death, even if they are no longer on active service.

Some gifts you give while you’re alive may be taxed after your death. A gift is classed as anything that has value such as money and property. If you give away more than £325,000 in the seven years before your death this will also be subject to inheritance tax. There is no inheritance tax to pay on cash gifts given to spouses or civil partners if they live in the UK permanently.

Other reliefs, such as Business Relief, allows some assets to be passed on free of inheritance tax or with a reduction.

Who pays inheritance tax?

If there is a will in place, it will usually be the executor of the will who is responsible for paying the inheritance tax. If there is no will in place the administrator of the estate will be responsible to pay. The inheritance tax is usually paid from the funds in the estate, or from money raised from the sale of assets if the estate has no cash.

Once the tax and debts are paid, the executor or administrator can distribute what remains of the estate to the heirs.

When does inheritance tax need to be paid?

Inheritance tax should be paid within six months after a person’s death. If the tax is not paid within the timeframe, HMRC will begin to charge interest.

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