Inheritance tax can cost your loved ones hundreds of thousands in the event of your death, yet it's possible to legally avoid huge amounts of it, or possibly pay nothing at all.
This quick guide will help you understand, calculate and avoid inheritance tax.
In This Guide
- What is inheritance tax?
- What are the inheritance tax rates?
- Who pays inheritance tax?
- Why do we have to pay inheritance tax?
- Can I reduce the tax bill in anyway?
What Is Inheritance Tax?
Inheritance tax or IHT is a tax that is paid on a person's estate when they die.
A person's estate includes:
- Cash in the bank
- Any property or business you own
- Payouts from life insurance policies
You will only need to pay inheritance tax if the estate is worth more than the current threshold.
What Are The Inheritance Tax Rates?
The rate of inheritance tax is 40% on anything above the threshold. The rate may be reduced to 36% if 10% or more of the estate is left to charity.
The threshold for 2015 is £325,000 and sometimes this changes. You can check previous years here.
Who Pays Inheritance Tax?
Usually the 'executor' of the will or the 'administrator' of the estate pays inheritance tax using funds from the estate.
An executor is a person named in the will to deal with the estate - there can be more than one. An administrator is the person who deals with the estate if there's no will.
If you've received an inheritance, you usually don't pay inheritance tax. Trustees are responsible for paying inheritance tax on trusts.
Why Do We Have To Pay Inheritance Tax?
The idea is that inheritance tax redistributes income from the rich, so that some of the money goes to the government and is spread out to the benefit of all.
But the argument against it is that you pay tax at the time you earn the money, so to pay tax on it again is unfair.
Can I Reduce The Tax Bill In Any Way?
There are a number of ways you can avoid inheritance tax (or at least reduce the bill).
- You can give £3,000 away each tax year inheritance tax-free
- Gifts to charities and political parties are inheritance tax-free
- You can give £250 each year to everyone you know
- Get married - your allowance will double
- Gift your house - but you will need to live for seven years, and pay rent