Inheritance tax is the tax calculated on a personâ€™s possessions, money and property (collectively called an estate) when they pass away. If the value of the estate is less than Â£325,000 there is usually no inheritance tax to pay, or anything above the Â£325,000 value is left to a spouse or partner, or a charity or sports club.
The basic rate for inheritance tax is 40% on anything over the Â£325,000 threshold, and this rate will reduce to 36% if 10% or more of the net value of the estate is left to a charity. The tax is usually paid from the funds of the estate so benefactors of the will would not usually pay any inheritance tax themselves.Gifts given up to 7 years before a personâ€™s death will affect any inheritance tax due from those benefactors. These gifts can be possessions or property as well as money. If a house or possession is transferred at a value less than its worth, such as selling a house to a grandchild for a price lower than the market value, the difference between the sale price and the market value loss would count as a gift. An individual has an annual allowance of Â£3,000 of which they can gift family and friends, and no tax will become payable on this.
Exceptions to this gift rule include:
â€¢ Wedding/Civil ceremony gifts up to Â£1,000 (Or Â£5,000 for children, or Â£2,500 for grandchildren)
â€¢ Christmas and Birthday gifts, provided a standard of living is maintainable after the gift has been made
â€¢ Living cost aid such as helping elderly relatives or children under 18
â€¢ Gifts to charities and political parties
Inheritance Tax on gifts above the Â£3,000 allowance, or not listed in the exceptions list, is calculated at a rate depending on when the gift was made in relation to the date of death. Gifts made less than 3 years before the date of death are taxed at 40%. After the 3rd year, the rates are as follows:
â€¢ 3 â€“ 4 years: 32%
â€¢ 4 â€“ 5: 24%
â€¢ 5 â€“ 6: 16%
â€¢ 6 â€“ 7: 8%
This relief scale is known as â€˜taper reliefâ€™.Example: Mary, a single lady, died on 1st June 2019. She gave 3 gifts in the seven years leading up to her death.
1. Â£310,000 paid to her sister 6.5 years before her death
2. Â£60,000 to her other sister 4.5 years before her death
3. Â£130,000 to her friend 3.5 years before her death.
None of the above gifts are part of the exemptions list so Mary is not entitled to relief.
The Â£310,000 gift to her first sister is used against the Â£325,000 inheritance tax threshold. The remaining Â£15,000 would be then used against the gift payment to her second sister, so there would be tax to pay on Â£45,000 at the rate of 24%. The Â£130,000 would be taxed at the rate of 32%.
Maryâ€™s remaining estate value would be charged at the usual 40% inheritance tax rate as the tax-free threshold has been used up on the gifts made.Tags:
Inheritance tax, Personal tax, Self-assessment Tax Return