Dealing with the logistics following the loss of a loved one can be challenging, particularly when it comes to managing their estate. Often, the deceased may have wished to leave many of their possessions to friends or family.
However, it’s crucial to remember that these items could be subject to a specific tax. Last year, HM Revenue and Customs (HMRC) collected £7.5 billion in inheritance tax.
If you’ve inherited a significant estate from a deceased loved one, the person responsible for handling the estate, known as the ‘executor’ in a will, is required to pay Inheritance Tax to HMRC.
What exactly is inheritance tax?
Inheritance tax is levied on the property, money, or possessions of someone who has passed away – referred to as an estate. However, this tax is generally only applied if the value of the estate exceeds a certain threshold.
Typically, there is no Inheritance Tax to pay if the estate:.
– Is valued under £325,000.
– Everything above the £325,000 threshold in the estate is left to a spouse, civil partner, charity, or a community amateur sports club.
However, the threshold may rise to £500,000 if a home is bequeathed to children, including adopted, fostered, or stepchildren, or grandchildren. If you’re married or in a civil partnership and your estate is valued less than your applicable threshold, any unused threshold could be added to your partner’s threshold when they die.
Current rates for inheritance tax
At present, the standard inheritance tax rate stands at 40 per cent. It’s crucial to understand that this tax is only levied on anything exceeding your applicable threshold.
For instance, if your estate is valued at £500,000 and your tax-free threshold is £325,000, then the tax charge will be 40 per cent of £175,000 i. e. £500,000 minus £325,000.
