How much is Inheritance Tax, when do we pay it and what does it cover?
Inheritance tax is a tax on the estate of a person who has died. The estate can include property, money accounts and other possessions. In the UK, the standard rate of inheritance tax is 40% above a threshold of £325,000. No tax will be paid if you leave everything above the threshold to your partner or an exempt beneficiary such as a charity. Moreover, if you give away your home to your children or grandchildren, the threshold can then increase to up to £500,000. According to data from the HMRC, only 1 in 20 estates in the UK pay inheritance tax.
How is it actually calculated?
If you have an estate which is worth £600,000 for example and you also have the standard threshold of £325,000, then a 40% tax rate is charged on £275,000 (£600,000-£325,000). The tax bill will be £110,000.
Who pays inheritance tax? When is it paid?
It is required by law that inheritance tax is paid within six months following a person’s death. In the case scenario that the tax is not paid by the end of this six month period, then interest starts being charged. The person who needs to pay the tax is the will’s executor. If there is no will, then the administrator of the estate needs to arrange the payment. In reality most inheritance tax is actually paid through the Direct Payment Scheme (DPS). In that way, the money for the payment of the inheritance tax could be directly accessed from the dead person’s bank account or building society account.
There are some tips on how you can reduce your inheritance tax bill. Some of them include making regular gift payments, putting your assets in a trust to be accessed by your heirs or paying into a pension instead of a savings account. A little known tip for reducing your inheritance tax bill is releasing equity from your home.
What is equity release?
Equity release is a process by which homeowners aged 55 and over can release and access cash from their homes. There are different equity release products on the market. With some of them you will be able to claim the money as a large lump sum or with some other products you can take a series of smaller sums. The two main types of equity release products are lifetime mortgages and home reversion schemes. Only in the course of this year, the whooping £3B property wealth was converted into cash via equity release. Releasing equity from your home can lower your inheritance tax bill and this is how it works. By releasing equity, you automatically reduce the value of your property which means less inheritance tax will be paid upon death. That is why it is important to discuss this with family members before a decision is being made.
