Inheritance Tax UK: The key rule likely to affect your final IHT bill | Personal Finance | Finance
Inheritance tax is currently levied by HM Revenue and Customs (HMRC) and is set at 40 percent. In most cases, the bill will have to be dealt with by the executor of a person’s will, and this may provide extra strain for those involved if not considered before a person’s death. The tax only applies to the value of a person’s estate which is above a particular threshold, which, for most Britons, is £325,000.
If a person leaves everything above the £325,000 threshold to a spouse, civil partner, a charity, or an amateur sports club, then there is usually no Inheritance Tax to pay.
Spouses and civil partners are permitted to provide one another with as much as they like during their lifetime, as long as they live in the UK on a permanent basis.
Inheritance Tax is not well-liked amongst a significant number of Britons, and is often described as a “death tax”.
Many see the tax as controlling of income before death, particularly due to one important rule Britons are urged to analyse.
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This means they will only be tax-free if a person survives for at least seven years after making the gift.
Gifts which are made three to seven years before death are taxed on a scale known as ‘taper relief’.
For gifts given less than three years before death, Inheritance Tax stands at 40 percent.
However, for three to four years before death, the tax stands at 32 percent, reducing to 24 percent between four to five years, and 16 percent from five to six years.
Gifting property, money or possessions between six to seven years before death, means a tax bill of eight percent on these gifts.
Finally, gifts given seven years or more before a person passes away then become tax free.
There are, thankfully, some gifts which are exempt, so Britons should pay attention to these.
Smaller gifts such as Christmas or birthday presents are known as ‘exempted gifts’ and will not be subject to tax.
In addition, people are allowed to give away £3,000 worth of gifts each tax year without these being added to the value of an estate in a process known as the ‘annual exemption’.
Britons can also give wedding gifts of up to £1,000 per person – rising to £2,500 for a grandchild, and £5,000 for a child – as well as gifts to charities and political parties without tax.
As many gifts of up to £250 per person can be given in the same tax year, as long as another exemption has not been used on the same person.
Many people may hope to give gifts away to reduce the value of their estate, and thus potentially their total tax bill, but these gifting rules must be borne in mind.
An Inheritance Tax bill must be paid within six months of a person’s death, and the estate dealt with by an executor.