Why are Inheritance Tax Rates Sometimes Different?

20 August 2018

Inheritance Tax is the tax that is payable on a person's Estate after they die, before the Estate is distributed to those set to inherit it. (Estate is the collective term for everything owned at the time of death.)

All Estates will have a tax free allowance and some people may plan their finances in different ways before they die to utilise the tax free allowance effectively. For details see Co-op Estate Planning.

In addition, some gifts (legacies) can be given to people, charities or other organisations without the need to pay any Inheritance Tax. If the deceased had chosen to gift money to charity, this can also reduce the rate of Inheritance Tax that will be charged on the rest of the Estate.

When Does Inheritance Tax Apply?

Inheritance Tax is payable on Estates in England and Wales that have a value above the Inheritance Tax threshold (also known as the nil-rate band) which is currently £325,000. Anything below the Inheritance Tax threshold can be passed down without the need to pay Inheritance Tax.

In most circumstances, anything above the £325,000 nil-rate band will be liable for Inheritance Tax. The standard rate for Inheritance Tax is currently 40%.

In some circumstances, however, the Inheritance Tax threshold may be higher. For example, if the deceased person chose to leave their home to their children then the Inheritance Tax threshold increases to £450,000 (as of 6 April 2018). This increased threshold is called the 'residence nil-rate band' and applies to biological, adopted, foster and step children.

Inheritance Tax Free Allowance

The Inheritance Tax (IHT) tax-free allowance can be transferred between spouses. If one spouse dies leaving an Estate that's worth less than £325,000, the remaining allowance that has not been used can then be transferred to the other person. This means that the other person's tax free allowance will increase.

Inheritance Tax Exemptions

When calculating the Inheritance Tax liability of an Estate after someone has died, it's necessary to take into account that some Beneficiaries who inherit will not require Inheritance Tax to be paid while others will.

Exempt Beneficiaries

People or organisations who can inherit without Inheritance Tax being charged are called "Exempt Beneficiaries".

If the deceased is leaving everything to their husband, wife or civil partner, then no Inheritance Tax will be payable. That's because these are Exempt Beneficiaries.

If the deceased has left gifts in their Will to a charity or a community amateur sports club, then these are also Exempt Beneficiaries, so no Inheritance Tax will be payable on these gifts.

What Can Be Transferred without Inheritance Tax Being Charged?

While alive, anyone is entitled to make gifts of up to £3,000 per tax year Inheritance Tax free. Larger gifts can be made but the person will need to survive for a further 7 years after these gifts have been made so they will not be liable for Inheritance Tax. However, if the person dies within 7 years of making the gift, then Inheritance Tax may be payable. If the annual allowance isn't used, it can be carried over into the next year (but will then be lost if not used that year).

Gifts that are given to someone on their wedding or civil partnership are exempt from Inheritance Tax, up to a certain value (parents can give up to £5,000, other relatives up to £2,500 and anyone else can give up to £1,000). If the gift is within the limit and given before the ceremony, then it can be given tax free. If the ceremony is called off the gift will then become taxable.

If someone leaves at least 10% of the net value of their Estate to charity, then any Inheritance Tax payable on the rest of the Estate would be charged at a reduced rate of 36%.

The person responsible for carrying out the administration of an Estate is also responsible for accurately calculating Inheritance Tax and reporting this figure to HM Revenue & Customs.

The task of calculating how much Inheritance Tax is due on an Estate is complicated and can be overwhelming for some. With our Probate Complete Service, we take full responsibility for calculating Inheritance Tax, Income Tax, Capital Gains Tax and liaising with HM Revenue & Customs on your behalf, so that you have one less thing to worry about.

If you need help with probate, contact us:

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