Inheritance Tax Law at a Glance

Inheritance tax law is a complex and often confusing area of taxation. In this article, we will provide an overview of the law, including what inheritance tax is, who pays it, how much it is, and some tips for planning your estate to reduce the tax burden on your loved ones.

What Is Inheritance Tax?

Inheritance tax is a tax on the value of a person’s estate, including all property, money and possessions, when they die. The tax is paid out of the deceased’s estate before it is distributed to their heirs.

Who Pays Inheritance Tax?

Inheritance tax is paid by the deceased person’s estate. If the estate is worth less than the threshold, which is currently £325,000, then no inheritance tax is due. If it is worth more than the threshold, then tax is paid at a rate of 40% on the amount over the threshold.

It is important to note that the threshold can be higher in certain circumstances. For example, if the deceased person gave away their home to their children or grandchildren before they died, their threshold may be increased to £500,000.

In addition, assets left to a spouse or civil partner are exempt from inheritance tax, regardless of their value.

How Much Is Inheritance Tax?

As mentioned, inheritance tax is currently charged at a rate of 40%. However, there are other rates that may apply in certain situations.

For example, if the deceased person left behind a property that is classified as their main residence, then their estate may be eligible for an additional residence nil rate band. This is currently £175,000 and will rise to £175,500 in the 2021/22 tax year. This means that for deaths occurring on or after 6 April 2021, the total threshold for inheritance tax will be £500,000 for those who leave behind a main residence.

In addition, if the deceased person left a specific legacy to a charity in their will, then the inheritance tax rate may reduce to 36%.

Planning Your Estate to Reduce Inheritance Tax

There are a number of ways to reduce the inheritance tax that will be paid on your estate. Here are a few examples:

1. Make a Will

Making a will is the first step in estate planning. It ensures that your assets are distributed in the way that you want them to be, and can help to prevent family disputes after you die.

2. Use Annual Gift Allowances

Each year, you can give away up to £3,000 tax-free, without it being counted towards your estate when you die. If you don’t use this allowance in one year, you can carry it forward to the next year. This means that a couple could potentially give away up to £12,000 in one year, without any inheritance tax implications.

3. Make Use of Exemptions and Reliefs

There are a number of exemptions and reliefs available that can reduce the amount of inheritance tax that is payable on your estate. For example, gifts made to your spouse or civil partner are exempt from inheritance tax, as are gifts to charities.

4. Use Trusts

Trusts can be used to reduce the amount of inheritance tax that is payable on your estate. For example, you could set up a trust to hold assets such as property or investments. When you die, these assets would pass to the beneficiaries of the trust, rather than forming part of your estate.

5. Consider Life Insurance

Another way to reduce the inheritance tax liability on your estate is to take out a life insurance policy. This can be used to pay the tax bill when you die, ensuring that your family don’t have to sell any assets to pay the tax.

Conclusion

Inheritance tax law is a complex area, but hopefully this article has provided a useful overview of the key points. Whether you are planning your estate or dealing with the estate of a loved one, it is important to seek professional advice to ensure that you are fully compliant with the law and taking advantage of all the exemptions and reliefs that are available.

Inheritance tax rates and thresholds are subject to change, so it is important to keep up to date with the latest information. The HM Revenue & Customs website is a valuable resource for information on inheritance tax, as well as other areas of taxation.

In the United States, many states have established inheritance tax law, which allows the state to collect an inheritance tax on certain assets inherited by an individual following the death of a benefactor. When an individual inherits property and assets, the inheritance will be taxed. As a result, the state will receive a specified portion of the inheritance and the beneficiary will not receive the total amount left to him/her.

Each state maintains unique inheritance tax laws, and therefore, the associated regulations vary significantly from one state to another. Generally, an inheritance tax is only warranted if the assets inherited value a specified amount. Therefore, only large estates and inheritances are subject to inheritance tax. Inheritance tax functions on the state level, while estate tax operates on the federal level. An individual should be aware of the inheritance tax law in his/her state when planning his/her estate, or when inheriting assets from a benefactor.