Do you know what inheritance tax is? It is a tax due on a deceased person’s belongings, such as their property, money, and other possessions. It is applied when the person dies and any gifts made to other people who have received a gift from the person in the past seven years. However, such tax isn’t applied to any real estate worth less than £325,000 or, if anything above the amount is left to charity, a civil partner, or even a spouse.

Curious to learn more about inheritance tax? Let’s delve deeper into the topic, talking about who is liable for inheritance tax, how to reduce inheritance tax liability, and more:

Who Is Liable to Pay Inheritance Tax?

Inheritance tax is a tax that is payable by a deceased person’s estate. In other words, it is paid by a person’s beneficiaries when a person dies. All the money a person has is a part of their estate. However, the tax won’t be applied to the money until it has been passed on to the beneficiaries.

For example, if a person has £400,000 in the bank and £400,000 in property on which they pay £10,000 in rent per year, and they die, their estate would be worth £800,000. However, the tax won’t be applied to half of the estate (in this case, the £400,000) because the person has either gifted it to their spouse (free of inheritance tax) or used it to pay for their living expenses (such as their rent). Those who are liable to pay inheritance tax are the beneficiaries.

How Does One Reduce Inheritance Tax Liability?

While inheritance tax is unavoidable for large estates, it is possible to reduce the amount of inheritance tax payable if you know how to lower the value of your estate. To do that, you need to reduce the value of your estate, which can be done by gifting your expensive belongings to your loved ones before leaving them for good. It is also possible to reduce/avoid the tax by giving your possessions away to charity.

For example, if your estate includes a house worth £800,000, it will be subject to inheritance tax. However, if you give the house to your spouse, they don’t have to pay any tax, and the estate’s value will be reduced to £0.

How Exactly Is Inheritance Tax Charged?

Inheritance tax is quite straightforward to calculate. The tax is charged at 40% and an additional 3% for each complete year that the deceased person was aged over 75. It is applied to the value of the estate. 

For example, if the value of the estate is £800,000, the amount of inheritance tax paid will be £320,000 (40% of £800,000). However, if the person is aged over 75, the amount of inheritance tax paid will be £380,000 (40% of £800,000 + 3 x £320,000).

Conclusion

No matter how much you dislike paying taxes and how high the tax life is in your country, you will be liable to pay inheritance tax if you ever leave behind an estate worth more than £325,000. However, you need to know that your beneficiaries won’t have to pay it if you pay the tax. Also, you need to know that such tax can be reduced by gifting your estate’s belongings to those who are close to you before you pass away. By knowing these various things, you can make the financial burdens of your loved one much less, allowing them to continue living without too much trouble when you finally go.

Wills and Probate offer services covering wills and probate advice on inheritance taxes in the UK. Reach out to us today and find out how we can help you!