Inheritance tax is imposed on some trusts, gifts, and estates of deceased individuals. UK residents are not automatically required to make an inheritance tax payment. This charge applies only when the value of an estate exceeds the government-imposed threshold, which tends to change each year.
The threshold for 2013-14 is £325,000 and a 40 percent tax is imposed on the estate value that exceeds this figure. If the estate qualifies for a reduced rate due to a charitable donation the tax rate is 36 percent.
Who is Responsible for Inheritance Tax Payment
When someone dies, the executor or personal representative of his or her estate is usually accountable for the inheritance tax payment. The value of an estate is calculated by summing values of the included assets and deducting any existing debts of the deceased, which may include funeral expenses.
Gifts that the deceased made while living that do not qualify for exemption must be counted when valuing the estate. The inheritance payment is made from estate funds.
In most situations, inheritance tax must be paid by no later than six months from the end of the month of death. Interest charges apply to any amount outstanding after this time. It the estate value includes property such as a home, inheritance tax may be paid in instalments on an annual basis over a period of ten years.
The inheritance tax interest rate is three percent and instalment payment interest is 0.5 percent. These rates have not changed since September 2009.
Inheritance Tax Threshold Adjustment
A surviving married or registered may increase the threshold for inheritance tax on his or her estate when the other party dies. This rule was put into place in October 2007 and for 2013-14 the estate may be increased to £650,000.
The executor or personal representative of the deceased’s estate must transfer the unused inheritance tax threshold when the first individual dies. If a deceased individual leaves any assets to a spouse or civil partner with a permanent residence in the UK, inheritance tax is not usually owed on these assets even if their value exceeds the inheritance tax threshold.
Reducing Inheritance Tax with Life Insurance
Calculating the estimated value of your estate upon death will reveal whether inheritance tax may be owed. If this tax seems unavoidable, consider purchasing a life insurance policy to reduce the amount that may be owed. A whole of life policy that covers the estimated tax will pass more money along to beneficiaries.
Writing the policy into a trust prevents the payout from being included in the value of the estate. As an additional benefit, premiums paid for a whole of life policy reduce the value of your estate while you are alive.
Another way to reduce potential inheritance tax is to give away a portion of your estate while you are alive. If you die within seven years of doing this, the estate may be subject to inheritance tax but this tax rate declines during the seven-year period.
The potential liability can be covered by purchasing a decreasing term policy with a seven-year term. Beneficiaries can use the payout to pay the inheritance tax.