When someone passes away, it can be a complicated process to sort out inheritance. If you are a relative of the person, you may be in line to receive an inheritance from their estate, which means any assets including cash, stocks, or material goods. As with any significant income, a tax is imposed on inheritance but there are certain exemptions and thresholds you are able to use to avoid paying a larger tax bill than is required. It is important to be aware of these, so allow us to walk you through how the inheritance tax (IHT) process works.
What is inheritance tax?
Inheritance taxis a tax on the estate of someone who has died. Depending on the value of their estate, there will be specific taxes to pay. For the tax year 2021-22, there is no inheritance tax to pay if your estate is worth below the £325,000 threshold when you pass away, and this threshold has remained in place since 2010-11. For married couples, any assets left to your spouse will be exempt from inheritance tax thresholds. The standard inheritance tax rateis 40% and is only charged on the part of your estate above the threshold. For example, if your estate is worth £500,000, you will be taxed on the £175,000 that qualifies.
When do you pay inheritance tax?
- Inheritance tax must be paid by the end of the sixth month after the death of the person, at which point HMRC will begin to charge interest on your IHT bill.
- You may choose to pay the tax on assets such as property over a number of years in specified instalments, however you will still be charged interest on this outstanding tax amount.
- Your estate is distributed to all recipients only once inheritance tax and any other debts or funeral expenses are paid off.
- Depending on what they inherit, recipients may have to pay income tax on any regular income they are receiving as a result of the inheritance, such as rent from property.
- Anyone who has received gifts from the deceased person before they passed may have to pay IHT, but this is only if they received more than £325,000 and the person died within 7 years of gifting it to them.
- Most life insurance policies will be included in the estate of the deceased person unless the policy is written ‘in trust’ when taken out. This can usually be done at no extra cost with most providers when taking out the policy.
If you are struggling to calculate inheritance tax, or are trying to calculate other taxes, both business and personal, our experts at Omer & Company can offer you a helping hand. Our comprehensive tax services can cover anything related to calculating corporation tax for your company, or income tax that you are personally eligible to pay. To find out more about the complete accountancy services that we have built our reputation on, or to discuss our tax services with us, give us a call on 020 8850 0700 or email firstname.lastname@example.org.