How does Inheritance Tax work?

When writing your Will you need to consider and account for Inheritance Tax, a tax applied to the value of your estate after your passing. This article explains how this form of tax works, what you need to be aware of and how a solicitor can help you to minimise the amount of potential Inheritance Tax your beneficiaries will have to pay on your estate.

The value of your assets will be calculated after your death and after any outstanding debts are settled and funeral expenses are paid. If the remaining estate value is above the Inheritance Tax threshold, what you leave behind for your beneficiaries will be taxable.

Inheritance Tax thresholds

There are two Inheritance Tax thresholds, one for single people and the first person to pass away in a marriage or civil partnership, and a second for surviving civil partners, widows or widowers. For both scenarios, tax is currently applied at 40% of the final estate value above these thresholds.

For single people and the first person to pass away in a marriage or civil partnership the threshold is £325,000 and the threshold for widowers, widows and surviving civil partners is £650,000 if the deceased partner has left their entire estate to them.

Inheritance Tax scenarios

If you are single and you pass away leaving an estate valued at £500,000, £175,000 of your estates value will be above the £325,000 threshold meaning £70,000 will be paid in Inheritance Tax. However, if you are the first person to die in a marriage or civil partnership you can pass on the value of your entire estate to your husband/wife/civil partner free of Inheritance Tax and regardless of the value of your estate. This is because husbands and wives or civil partners do not pay inheritance tax on money and/or property they leave for each other. Should you leave some of your estate to your husband/wife/civil partner and a portion to other beneficiaries, then the amount of Inheritance Tax taken will depend on the full value of your estate and who the beneficiaries are.

If you are a surviving civil partner, widow or widower who has previously inherited the entire value of your deceased’s partners estate you also gain their Inheritance Tax allowance which increases your individual threshold from £325,000 to £650,000. Therefore, if your deceased partner has left you their estate at a value of £400,000 and your estate is valued at less than £249,999 then your final estate value of £649,999 is exempt from Inheritance Tax. Should the total combined estate value be above £650,000, you estate will be Taxed by 40% on the value above £650,000.

Additionally, people who have left estates after dying due to a direct result of serving in the armed forces of emergency services are exempt from paying Inheritance Tax on their estate.

Calculating your estate value

If you are concerned that your estate’s value is likely to exceed the Inheritance Tax thresholds there are ways to minimise the amount paid or to avoid paying Inheritance Tax at all. Solicitors are experienced and knowledgeable with the ins and outs of Inheritance Tax and can establish how to achieve the best outcome for those you are leaving your estate to.

At Rollingsons, we work closely with tax advisors to find the best scenario for your specific circumstances. We are respected Will drafting lawyers with the skills and experience required to manage the complicated process of writing and executing Wills. For more information or to arrange an initial consultation, please contact us on 0207 7611 4848.