A Simple Guide To Inheritance Tax
Have you ever wondered what will happen to your parents’ possessions when they die? I know this is a fairly grim question, but it’s one worth knowing the answer to.
I always assumed that, as our parents’ children, me and my siblings will inherit their entire fortune. The house that they own will become ours, in addition to their money and other possessions. If we don’t inherit our parents’ full fortune, it’s because their will ordered otherwise.
Of course, when I actually did some research, I learned that the ins and outs of inheriting aren’t as simple as I thought. If your parents die, there is a chance that you won’t receive the full value of the fortune that they left for you. Why? Because of inheritance tax.
What is inheritance tax?
Inheritance Tax is the tax on the estate of someone who has died. The “estate” refers to all property, possessions, and money owned by the individual.
Inheritance tax will need to be paid if the value of your parents’ (or grandparents’) estate is above £500,000. Currently, this is taxed at 40% above the £500,000 threshold. Anything below £500,000 isn’t taxed.
For example, if you’re due to inherit your father’s estate, which is valued at £450,000, no inheritance tax will need to be paid.
In contrast, if your father’s estate is valued at £650,000, a 40% tax will be paid on the amount above the £500,000 threshold. In this case, it would be a payment of £60,000. This means that you would inherit the remaining £590,000.
One thing to note is that the threshold for paying inheritance tax changes depending on who is inheriting. The threshold of £500,000 only applies if you are inheriting from your parents or grandparents. If you are inheriting from your aunt, uncle, cousin, or friend, the tax-free threshold drops to £325,000. This means that a 40% tax needs to be applied to anything above this figure.
In contrast, if you’re inheriting from your spouse or civil partner, no inheritance tax needs to be paid no matter the value. You can inherit everything tax-free.
Avoiding inheritance tax
- The value of the person’s estate if below the applicable threshold
- Anything above the applicable threshold is given to charity
- The estate is inherited by a spouse or civil partner
- You are gifted parts of a person’s estate 7+ years before their death
Who pays inheritance tax?
If you are the person inheriting the property, you do not usually have to pay the tax yourself. The tax is paid by the personal representative for the state before giving you the inheritance. This is the person managing the will to make sure everything is executed as planned.
That being said, there are odd cases where you may need to pay, which you can find out more here.