The beneficiaries of a will are not liable for nor will they pay inheritance tax – your estate is liable. Following your death your executors or your administrators – if you died without a will – will gather your assets and pay your liabilities. Any inheritance tax which is payable will also come out of this pot of money. Your beneficiaries will then receive any gifts once the inheritance tax has been paid.
What is included in my estate for inheritance tax purposes
The following are included in your estate and will be taken into account when valuing your estate:
- Your share of any jointly owned property;
- Any assets or money given away in the last 7 years;
- Bank accounts, shares, premium bonds etc;
- Property subject to a reservation;
- Insurance policies not written in trust;
- Certain trusts.
There are certain assets which will not be used when calculating the taxable estate including:
- Insurance policies written in trust (i.e. where the policy states who the payment will be made to upon your death);
- Discretionary pensions;
- Certain trusts.
Once the estate has been valued, any debts or liabilities (including reasonable funeral expenses) will be deducted from the total.
What about gifts to my spouse?
There are a number of exemptions and reliefs which may be applicable to your estate but the most common is the spousal exemption; any gifts to your spouse will be tax free and will fall outside of the taxable estate.
How much inheritance tax will my estate pay?
Once your executors or administrators have calculated the value of your taxable estate, the next step is to value the inheritance tax payable.
Every person has a nil-rate band of £325,000 which means that your estate will not pay any tax for the first £325,000. Thereafter whatever remains is taxed at 40% subject to any reduced rate resulting from charitable gifts.
Since October 2007 your estate is able to use any unused portion of a deceased’s spouse’s nil-rate band, meaning that your nil-rate band can be as high as £650,000, if your deceased spouse did not use any of their exemption (i.e. by transferring all their assets to you upon their death). This exemption applies to everyone who dies after October 2007 regardless of when their spouse died.
There are certain ways to plan for inheritance tax and to structure your will to take the best advantage of various exemptions and reliefs.
If you would like to discuss making inheritance tax or making a will, please give our specialist Wills & Probate department in Leeds, Wakefield and Manchester a call on 0113 244 9931.