How Much Tax Should I Pay?

Inheritance Tax or IHT, is a tax which is paid on a deceased individual’s estate. Unfortunately, IHT is the time at which life’s two great certainties come at the same time: death and taxes.

Threshold

Not everyone, however, must pay Inheritance Tax. Rather, only those whose estate is worth more than a certain figure are eligible to pay the tax. In the first instance, it may be useful to actually define what it is from which the tax must be paid. Upon death, any outstanding debts must be paid from the estate; that is, the total assets of the deceased. Presuming that there is money left over, the remainder is what will be taken into consideration when it is being decided whether or not Inheritance Tax is applicable.

In the same way that everyone receives a non-taxable allowance each year before they must pay income tax, there is a threshold under which Inheritance Tax need not be paid on the estate of a deceased individual. In the 2006-2007 tax year, this threshold is at £285,000. In other words, Inheritance Tax is only applicable if you own assets totalling over £285,000 at your death. Even if this is the case, there are several circumstances in which Inheritance Tax may not need to be paid. The most common of these is if the estate is to be passed directly to a spouse or civil partner. If this is the case, and both the deceased individual and the beneficiary live in the UK, then Inheritance Tax is not applicable, regardless of the size of the estate.

Gifts

It is also important to note that gifts made up to seven years before death may be taxable. Individuals are allowed to give away up to £3,000 per year during these seven years before Inheritance Tax is applicable, but after this threshold all gifts are dealt with in the same manner as the remaining estate. There are, however, exemptions to this; gifts to charity and wedding gifts are also exempt.

If an estate is deemed to be large enough to be taxable, then it is the duty of the executor of the deceased individual’s will to make arrangements for payment. Inheritance Tax, as of the 2006-2007 financial year, is payable at a rate of 40%. In order to ascertain whether or not the estate is taxable, the executor (or ‘personal representative’) must value all of the deceased person’s assets, as if they were being sold on the open market at the time of death. After this, the outstanding Inheritance Tax must be paid within 6 months before interest accrues on the remainder. It is generally possible, however, to break Inheritance Tax which is due on property and buildings down into instalments which may be paid over a period of up to ten years.

Probate and the nomination of an executor is covered in more detail elsewhere on this site, but in the light of Inheritance Tax it is worth remembering that, if you have a large estate, you should always seek professional advice before making any decision about a will. This can help to minimise the amount of Inheritance Tax which will be payable.