Inheritance tax (IHT) remains one of the most controversial levies in the UK, with many arguing that it serves as a type of ‘double’ taxation that unfairly penalises the estates of hard-working citizens.
However, income tax is often misunderstood, with this not applied in the vast majority of estates and just 4% of people actually required to pay a IHT levy on the total value of their estate.
In this post, we’ll explore IHT further while asking how this works and when it’s applied to estate holders.
What is Inheritance Tax?
In simple terms, IHT refers to a levy that’s applied to the estate of someone who has passed away.
This can include a broad range of assets, from cash holdings and property to stocks, shares, and collectible items like classic cars and valuable artwork.
Such estates are usually governed by a last will and testament, which dictates how remaining assets are distributed and to who. Where necessary, any owed tax must be repaid before the estate is distributed, with this process usually taking between six and 12 months to complete.
Will Inheritance Tax Affect Me?
Under current law, IHT is only levied against estates that are worth £325,000 or more. This is why such a small amount of estates are subject to IHT, with most people required to pay absolutely no tax at all.
However, if the value of your estate does exceed £325,000, you’ll be required to pay inheritance tax at a rate of 40%. This is a significant levy, especially if you’ve already paid a similar rate of income tax on all earned income during your lifetime.
For estates that are likely to be subject to IHT, the good news is that steps can be taken to avoid this levy or reduce the amount payable to the Treasury.
How to Plan Ahead
Ultimately, the key to estate planning is forward thinking, as distributing your estate proactively and before your death enables you to avoid or minimise the spectre of IHT levies.
You could participate in gifting, for example, through which you can ‘gift’ assets or cash holdings to future beneficiaries and remove these entities from your estate.
So long as you do this at least seven years before you die (which we admit can be difficult to plan), you can reduce the value of your estate and potentially avoid taxation without compromising on the distribution of your estate.
You can liaise with a lawyer or financial planner to organise this and ensure that you do everything correctly and compliantly.
What Do To Do If You’re Inheritance is Being Taxed
If your inheritance is being taxed or an estate is currently in probate you best bet is to discuss any issue regarding inheritance tax with the solicitor dealing with the estate. You’ll be able to source certain pieces of advice from reputable sources online like the .GOV website but your probate solicitor should be well equipped to assist.