Wills and inheritance tax

When dealing with a Will, one of the most common questions people have relates to how the estate will be affected by inheritance tax. The tax doesn’t apply to everyone, but for those it does affect, it’s worth knowing how much you’ll need to pay and how this figure is calculated.

What is inheritance tax?

Inheritance tax is a payment made in relation to the estate of somebody who has passed away. For the purpose of working out the amount of inheritance someone has left, the following are included in the estate:

• Savings
• Possessions
• Properties
• Pension

To stop people flouting the inheritance tax law, any property or money given away up to seven years before someone passes also counts towards the inheritance valuation. This way, people can’t give away anything just before they die and avoid paying their tax.

What is the inheritance tax threshold?

Inheritance tax is only payable if the value of the estate is over the threshold of £325,000. If this threshold is passed, everything above this amount will be taxed at a rate of 40%. For example, if an estate is valued at £500,000, only £175,000 would be taxable in accordance with the threshold, meaning that a total of £70,000 would be owed in inheritance tax. However, if everything above the £325,000 threshold is left to a spouse, civil partner or charity, then inheritance tax is not payable. It’s also worth noting that inheritance needs to be reported irrespective of whether it passes the £325,000 threshold.

What is exempt from inheritance tax?

Donations left to charity in your Will are exempt from inheritance tax, and further to this, if more than 10% of an estate is left to charity, the overall inheritance tax rate is reduced to 36%. As previously mentioned, inheritance tax doesn’t come into question if an entire estate is left to a partner, and gifts up to the value of £3,000 are also exempt from inheritance tax.

Who pays inheritance tax?

Inheritance tax is paid by the executor of the Will and can be paid for using either funds from the estate or by selling assets left in the Will. Before someone passes, it’s worth considering roughly how much inheritance tax will need to be paid and setting aside those funds to make it easier for the executor to complete the process. The executor must pay any inheritance tax within six months of the person named in the Will passing away. If the tax isn’t paid on time, interest will be owed on the inheritance tax. Some people decide to pay certain charges in instalments over the resulting years, but anyone wishing to do so should be aware that interest will be charged even if this is declared within the six-month timeframe. As it can take some time for the total value of the estate to be ascertained (e.g. if a property is in the process of being sold), a portion of the tax can be paid before the end of the time limit to avoid further interest.

Inheritance tax calculators

You can use the following calculator from Which? to help value your estate and check how much inheritance tax you are likely to pay.

Which? inheritance tax calculator

If you want to work out the amount needed to qualify for a reduced rate (36%) of inheritance tax, you can use the reduced rate calculator from gov.uk

gov.uk inheritance tax reduced rate calculator

In summary

Paying inheritance tax can seem like a tricky process to navigate, but with the right preparation, it can be relatively straightforward. Additionally, by leaving a gift to charity in your Will, you can reduce the impact of inheritance tax and make a difference to the causes you care about.

Speak to us today to find out how leaving a gift in your Will could help lower your inheritance tax rate and make a lasting difference to your favourite charity.

Email: info@rememberacharity.org.uk