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What is Inheritance Tax?
It’s never easy to talk about what happens when someone dies, but it’s important to be clued up on the law in the event that you or someone you’re close to does pass away.
If your estate – your property, belongings and money – is worth more than £325,000 when you die, a chunk of it may be taxed. This money goes to the government.
A high threshold getting higher
Everyone is entitled to a personal tax-free threshold when it comes to Inheritance Tax, so you won’t have to pay a penny unless your estate has a higher value than £325,000.
Plus, if you’re married or in a civil partnership, your estate won’t be taxed if you die as it will just pass to your partner. Your tax-free threshold also passes over to them, meaning their estate won’t be taxed when they die unless it’s worth over £650,000.
Changes to the law on Inheritance Tax mean that homeowners get an extra £100,000 tax-free on their home from 6 April 2017. This is set to rise to £175,000 by 2020-21. This extra tax-free allowance only applies to you if you leave your home to children or grandchildren, but the same rules apply if you leave your estate to your partner.
If your estate is over the threshold, it will be taxed 40% on every pound that’s over the limit. So if your estate is worth £500,000 in total, £175,000 of it is taxed 40% - so that’s £70,000 to the government.
Who pays the tax and when?
Usually, the executor of the person’s will is the one that’s responsible for paying the tax. The money comes from any cash that’s in savings, or from selling the person’s assets. If the person who passes away doesn’t have a will, the administrator of the estate will arrange the payment of the tax.
In some cases, the person who has died may have set aside money to pay the tax, or it may be covered by their life insurance.
You’ll have to try to make sure the tax is paid within six months following the person’s death – if it isn’t, interest will be charged on top of it. If it’s taking a long time to sell the property, you may be granted extra time while you wait to receive the cash from the sale.
As soon as the tax is paid, the executor of the will or the administrator starts the process of sharing out the remaining estate to all of the heirs.
Remember, although no one likes to think about it, it’s really important that you make a will if you want your estate to be distributed between your loved ones. Not having one in place when you pass away may mean your belongings pass on to family that you hadn’t intended it to, and this can cause extra stresses for the people closest to you.