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October 26th 2017 / BY: Wisteria

How Do I Calculate Inheritance Tax on an Estate?

Inheritance tax (IHT) is a tax which can be payable during an individual’s lifetime, but more commonly when someone dies. The tax imposes a charge at a rate of 20%, 36% or 40% on the value of a gift or on a whole estate, depending on the circumstances.

However, the calculation is complex with many rules and reliefs. The below gives a basic guide to inheritance tax and the method of calculation. In most cases, professional advice will be necessary.

When does Inheritance Tax Apply?

Lifetime inheritance tax is normally only paid on gifts to a trust and so is far less common. These are called “chargeable lifetime transfers”.

Most other gifts made during an individual’s lifetime will be considered to be “potentially exempt transfers” (PETs) and will often only create a charge to inheritance tax if the individual making the gift (called the donor) dies within seven years of the date of the gift.

Inheritance tax on death applies to all estates by default. The value of an estate is calculated using a method stipulated by law, but generally will include all of the assets of the deceased. The liabilities of the deceased are also taken into account. Gifts made within seven years of the date of death will often also form part of the estate.

Is there a tax free allowance / What is the nil rate band?

Each individual will normally be entitled to a minimum nil rate band of £325,000 (as at 17/18). The implication is that the first £325,000 of an estate is chargeable to IHT at 0%. As a result, most small estates are automatically free of IHT.

In addition, in the case of a husband and wife, or registered civil partners, if on the death of the first partner their estate is left to the other, then two nil rate bands will be available on the second death. This will mean that the first £650,000 of the estate will be charged at 0% to IHT

There is also a new residential nil rate band, which can exempt more of the estate where the family home is left to the next generation. However, the rules around this are complex and so are for another article.

What tax reliefs are available?

There are a number of reliefs available which might reduce the tax payable, including:

  • Transfers to a spouse or civil partner are generally exempt from inheritance tax. Special rules apply where an individual is domiciled outside the UK.
  • Business property relief – available in cases where the deceased owned a business, business assets or shares in a qualifying company.
  • Agricultural property relief – where the individual owned qualifying property, such as farm land.
  • Annual exemption – everyone has an annual allowance of £3,000 for each tax year. This can be rolled over one year, where not used in the previous year.
  • Small gifts exemption – covering a number of circumstances such as small gifts or gifts made in contemplation of marriage.
  • Legacies to charity – money left to charity will be exempt from inheritance tax and in some cases will reduce the rate of tax payable on the rest of the estate.

How do I know whether I need the help of a tax expert?

IHT is complex and if you are unsure on any point, it is always worth checking with an expert. Generally, estates valued at more than £325,000 should also seek to clarify with an expert whether inheritance tax will apply.

A professional expert is nearly always required for:

  • Estates with a value exceeding £650,000.
  • Estates with business property or agricultural property.
  • Estates where the individual died intestate (without a valid Will).
  • Individuals with international tax affairs, or complexities around residency and domicile.

Wisteria’s tax team has extensive expertise advising on inheritance tax and the company is one of the first firms of accountants to become licensed probate specialists, meaning that we can complete all legal and tax work for most estates without the input of a solicitor.

For more information on our tax and probate services, please contact us on 020 8429 9245 or email us at info@wisteria.co.uk.