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What Is Inheritance Tax?
How Does It Work and How Is It Calculated?

Do you pay tax on inheritance? In a nutshell – yes, you do, unless inheritance comes from a tax-free source. Whether from property, cash or investments, any gains that come from inherited assets are, in general, taxable. For instance, any subsequent earnings from inherited stocks, dividends, or mutual funds are taxable. Today, we are touching on several important inheritance tax-related questions such as how it works, how it is calculated, and how to avoid it (yes, it is possible in some cases).

What Is Inheritance Tax? - TBW Blog

What Is Inheritance Tax?
Inheritance tax (IHT)is a tax paid on the money, possessions, or properties (in one word – estate) inherited from someone who’s died. The standard IHT is 40%, charged on the part of one’s estate that goes above the threshold. There are ways to reduce or avoid IHT – by putting it into a trust or giving away a certain amount (which we’ll discuss later). Inheritance taxes are calculated only after funeral expenses and debts have been deducted.

How Does Inheritance Tax Work?
Any amount can be passed to a spouse or civil partner without any IHT implications due to spouse exemption. Passing estate on to direct descendants – siblings, nieces, nephews or friends -includes paying a 40% tax bill. Any amount over £325,000 per individual is taxable.

What is the UK Inheritance Tax Threshold?
As mentioned, up to £325,000 falls into the category of tax-free inheritance, also known as the Nil Rate band (NRB), the standard rate of tax is 40% above the threshold. So, if someone wants to leave behind £800,000, the tax payable would be 40% of the difference between £800,000 and £325,000, which is £475,000. The tax bill would be £190,000. This is how inheritance tax is calculated.

There is also an additional tax-free allowance of £175,000 per individual provided you leave your your main residence to direct descendants such as children and grandchildren. This additional allowance is known as the Residence Nil Rate Band (RNRB)

How to Avoid Inheritance Tax?
Gifts between spouses and to charities are tax-free. Gifts made 7 or more years before the death of an individual are also tax-free. If an individual dies within these 7 years, the taxable amount will depend on when the gift was made. Some of the most common ways to avoid inheritance tax include:

• Giving away some of the money
• Minimising retirement account distributions
• Having a Deed of Family Arrangement in place
• Setting up a trust

Who Pays the Inheritance Tax Bill?
The inheritance tax bill is paid from the estate. As explained, the estate includes properties, investments and money, minus expenses, which include mortgage, unpaid bills, tax liabilities, other debts and funeral expenses. Inheritance tax bills should be paid by the executor or administrator of the estate within 6 months after the person died, after which interest starts to accrue.

The inheritance tax return needs to be filed within 12 months of the date of death. To be able to make a payment, an inheritance tax reference number needs to be applied for at least 3 weeks before the payment.

If you could benefit from inheritance tax advice, talk to specialised solicitors in Bexleyheath, Thomas Boyd Whyte. TWB Solicitors can help you share out your estate and reduce the amount of inheritance tax.

For probate matters, please Contact Us in order to discuss how we can help you.