It will come as no surprise that not only do you pay tax while you are alive, but you also pay tax on your estate (possessions which include property, shares and money) when you die if your estate is worth more than £325,000, the Inheritance Tax Threshold.
Inheritance Tax (IHT) is charged at the rate of 40% on estates worth more than the IHT Threshold, however interestingly if more than 10% of the estate is left to charity the IHT rate can be possibly fall to 36%.
The inheritance tax is required to be paid within six months of death, and this is usually dealt with by the executor of the will or the administrator of the estate. However, if it proves difficult to dispose of some of the assets such as shares or property then instalment payments can be made to HMRC over and up to a period of ten years.
Many of you will be familiar with the term the Seven Year Rule, but what exactly is it?
If the deceased gifted any asset from their estate seven years before their death with a value of more than £325,000 then inheritance tax will be required to be settled by either the estate or the person in receipt of the gift. However if the gift is made between three and seven years prior to death there is sliding scale charge reduction
If the death occurs within the first 3 years after the transfer there will be 100% of the tax due.
If the death occurs between years 3 and 4 then 80% of the tax would be due
If the death occurs between years 4 and 5 then 60% of the tax would be due
If the death occurs between years 5 and 6 then 40% of the tax would be due
If death occurs between years 6 and 7 then 20% of the tax would be due.
For example if a gift of £400,000 was made four years prior to death the IHT liability would be the threshold £325,000 less £400,000 leaving a gift of £75,000 taxed at 40% totalling £30,000 however due to the scale charge only 40% of this sum would be taxable - £12,000.
Of course if the person making the gift lives longer than seven years there is no tax to pay on the gift, however it is worth noting than they will have surrendered their threshold limit on the above example.
You can also make small gifts of £250 to any individual, along with gifts to your children of £5,000, grandchildren £2,500 and others £1,000 as a wedding present. These gifts are free of inheritance tax.
In addition to the above, each individual is also entitled to a £3,000 annual allowance for making gifts, however if they do not take full use of the allowance they can carry over the balance of the allowance up to a maximum of £6,000.
This article only covers the most basic points in respect of inheritance tax, therefore if you would like to discuss any inheritance tax issues or concerns you may have we would be delighted to discuss those with you.