What is Inheritance Tax?
Inheritance Tax is the tax paid on a person’s estate when they die. Their estate will consist of all assets that they owned at the time of death less all the liabilities, including mortgages and other loans.
Used to affect only the rich
Many people consider that Inheritance Tax is not something for them to consider as it only affects the rich. This is no longer the case and an increasing number of ordinary families are having to pay the tax. In 2012, 20,000 estates faced a bill for Inheritance Tax.
If you add up the value of your house, savings, life insurance policies and other assets, you may be surprised by your own net worth.
The increase in house prices in the last decade is the primary reason for the increase in the number of families facing an Inheritance Tax liability.
The second reason is the government’s decision to hold the threshold for Inheritance Tax at the same level since 2009. The threshold used to rise every tax year (April 6 to April 5) between £10,000 to £15,000, roughly in line with inflation but has now been frozen until further notice.
There are a number of ways, which are completely legitimate, to reduce the burden.
How Inheritance Tax is calculated
Inheritance Tax is charged at a rate of 40% on the estate over the threshold of £325,000. A person is allowed to leave money, investments, property and other assets up to a total value of £325,000 before Inheritance Tax is payable. This is called the ‘nil rate band.’
If the value of all the deceased’s assets after deducting liabilities, such as their mortgage, is more than £325,000 then there is a potential Inheritance Tax liability.
Above the threshold of £325,000, tax is charged at 40%. So, if the deceased’s personal assets were £400,000 Inheritance Tax would be charged on the top £75,000, 40% of which is £30,000.
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