Inheritance Tax Planning
Inheritance Tax is generally paid on someone's estate when they die, although sometimes, some tax may be due on trusts or gifts before someone dies. Only estates (the net worth of an individual) are assessed for income tax and they have to value at £325,000 or more.
Special inheritance rules for married couples and civil partners can double the £325,000 threshold by switching the first person's 'nil rate band' when the second person from the couple dies. Don't forget that the surviving partner in a couple generally does not have to pay IHT, regardless of the estate value.
Inheritance Tax, commonly called IHT, is usually paid by the person handling the deceased person's affairs. The tax is paid at a flat rate of 40% on the value of the estate over the threshold: £325,000 for individuals or £625,000 for couples.
Working out the tax is a matter of working out the deceased's net worth. Basically, tally up the value of any assets, insurance policies and savings in one column, and do the same for any debts and expenses in the other. Subtract the debts from the assets. The figure left is the net worth.
For example: someone has a house and car valued at £250,000 with £30,000 savings in the bank and life insurance of £50,000. The total is £330,000.
Take away credit card debt of £800 and £1,500 owed on a car loan to leave £330,000 - £2,300 equals a net worth of £327,700.
Now deduct the £325,000 IHT threshold to leave £2,700. Tax is paid on this at 40%, leaving a bill of £1,080.
HM Revenue and Customs expects an IHT bill to be settled within six months of the end of the month when the deceased died. Special arrangements can be made if the estate is particularly complicated to finalise and the money is tied up in property that may take a time to sell, like a house.
In these circumstances, the taxman may wait up to 10 years for the final payment. If a house is sold and then property prices plunge, a special IHT rule lets the estate reclaim overpaid tax with interest.
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