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Interitance tax

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Quick Links

- How it works
- When is Inheritance tax payable?
- Is there a limit on how much I can give away during my lifetime?
- I want to give my property to my children; will this be ok?
- I own a property abroad does this count for inheritance tax?
- Who pays inheritance tax?
- What is the deadline for paying inheritance tax?
- Is there anything that can be done if there is insufficient cash to pay the tax due?
- What forms will I need to complete?

When is Inheritance tax payable?The origins of Inheritance tax can be dated back to the Roman Empire when Julius Caesar introduced a levy to provide retirement funds for the military.

How it works

When someone dies their assets (the estate) needs to be valued. This value will include assets held at the date of death and also certain gifts made in the seven years prior to death, and in exceptional circumstances, earlier than that.

Things which do not count generally include:

  • transfers of all assets between spouses (including civil partners) are normally treated as exempt transfers
  • assets passing either by way of will and/or lifetime gift to charities, educational establishments, political parties
  • gifts up to a specified annual allowance
  • small gifts up to £250 per person per annum can be made to any number of individuals but restricted to 1 per individual
  • business/agricultural assets that qualify for business/agricultural property relief
  • marriage gifts up to specified limits of £5000/2000 from parents/grandparents and £1000 from others
  • gifts made from income.

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When does an estate have to pay inheritance tax?

The current limit on the value of estate for inheritance tax purposes is £325,000 per person or £650,000 per couple provided one of the couple was alive after 9th October 2007.  It only applies to assets which are yours including any share of jointly owned property.

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Is there a limit on how much I can give away during my lifetime?

Generally no but gifts of money in excess of the level of exempt gifts may be subject to tax should death occur within 7 years of the gift. Such transfers are referred to as potentially exempt transfers or PETS.

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I want to give my property to my children; will this be ok?

Yes it is possible to gift your property or any other assets to your children during your lifetime and if you survive more than 7 years the value of that gift will not be included in your estate for inheritance tax purposes.  However if you remain living in the property, or receive an income from it, it may be that the gift is not considered to be an outright gift and therefore still included.  Such an arrangement is known as a gift with reservation.

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I own a property abroad does this count for inheritance tax?

How this will work depends on:

  • your domicile status
  • the terms of any double taxation agreement.

If you are domiciled in the UK it is likely the property will count but may have a whole/partial exemption if there is a double taxation agreement.  In other words it can be complicated.

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Who pays inheritance tax?

This depends on the circumstances. 

  • In the case of an individual’s estate the executor or personal representative will pay with funds from the estate.
  • Trustees are usually responsible for paying tax on assets within a trust or transferred into a trust
  • Occasionally recipients of gifts or who inherit from the deceased have to pay but this is uncommon

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What is the deadline for paying inheritance tax?

In most cases tax is payable within 6 months from the end of the month in which the deceased died.

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Is there anything that can be done if there is insufficient cash to pay the inheritance tax due?

Yes – it is common for estates to comprise largely of property as opposed to liquid assets. Where tax is directly attributable to the value of the property it is possible to spread the payment over 10 annual instalments or if earlier until such time as property is sold. 

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What forms will I need to complete?

You will have to fill out an inheritance tax form as part of the probate process (or confirmation in Scotland) even if no inheritance is due.  Different forms are used depending on where deceased lived and whether there is any tax to pay. You must pay some or all of the inheritance tax due before probate (or confirmation) may be obtained.

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