The inheritance tax threshold for 2020/21 is £325,000. Anything over the threshold is liable to 40% tax – but it doesn’t apply to every case.
What is the inheritance tax threshold for 2020/21?
The inheritance tax threshold for 2020/21 is £325,000 – this is also known as the nil rate band. If you’re the executor or administrator of an estate worth over £325,000, you may need to arrange for inheritance tax to be paid.
How much is inheritance tax?
The inheritance tax rate is usually charged at 40% of everything over £325,000. This means that, if the estate is worth £425,000, it would be liable to £40,000 in inheritance tax.
However, if more than 10% of the estate is left to charity, the inheritance tax rate may be reduced to 36%.
What is the inheritance tax threshold for married couples?
The inheritance tax threshold for married couples in the 2020/21 tax year is £325,000. However, this can be increased to £650,000 if one partner dies and leaves everything to the surviving partner. This is because spouse's and civil partner's inherit from each other tax-free, and they also inherit their partner's unused inheritance tax allowance.
Does every estate have to pay inheritance tax?
The inheritance tax allowance doesn’t apply between spouses and civil partners domiciled in the UK. This means that, if the entire estate you’re dealing with has been left to the person’s spouse or civil partner, no inheritance tax will be owed – even if the estate is over £325,000.
Does everyone have the same inheritance tax threshold?
The short answer: no. It’s actually possible for many people to double their inheritance tax allowance to £650,000. Here’s how…
If someone who is married leaves their entire estate to their spouse, their unused inheritance tax allowance of £325,000 will also pass to their partner. This effectively doubles the surviving spouse’s inheritance tax threshold to £650,000. The same benefit also applies to people in a civil partnership.
This means that, if someone’s spouse or civil partner dies and leaves them their entire estate, the surviving partner’s inheritance tax allowance will effectively be £650,000.
Who pays inheritance tax?
If there is a will, the executor is responsible for paying the inheritance tax bill from the estate. If there isn’t a will, this is usually handled by the administrator.
Figuring out exactly how much inheritance tax is due can be difficult, so many people choose to use a professional probate service when dealing with their loved one’s estate.
Once the amount of inheritance tax owed has been calculated, this can either be paid from funds within the estate, money from the sale of assets, or through the Direct Payment Scheme (DPS). This is where inheritance tax is paid directly from the bank or building society of the person who died.
How to avoid paying inheritance tax
You can avoid paying inheritance tax in a number of ways, including:
Leaving everything to a spouse or civil partner: married couples and civil partners can leave assets to one another without incurring inheritance tax.
Leaving property to children: homeowners get an extra £175,000 added to their inheritance tax allowance if they leave property to their children, step-children or grandchildren, taking their total inheritance tax allowance to £500,000.
Leaving 10% of the estate to charity: if 10% of an estate is left to charity, the inheritance tax rate can be reduced from 40% to 36%, potentially cutting the amount of inheritance tax due by thousands.
If you're dealing with someone's estate and want to change their will to make it more tax efficient, you could get a legal document called a deed of variation.
For more information on making your own will tax efficient, please take a look at our free guide on how to avoid inheritance tax.
When do you need to pay inheritance tax?
Inheritance tax ideally needs to be paid by the end of the sixth month after your loved one’s death. After this point, HMRC will start charging interest. They may also charge late payment penalties, which can be as high as £3,000 if the payment is more than 12 months late. It’s therefore important to apply for probate and gain access to the estate as quickly as possible.
How to fill out IHT400
IHT400 is a government form that needs to be completed in England, Wales and Scotland if the estate is liable for inheritance tax. This is a long, complex document with multiple sections for different types of assets, allowing you and HMRC to work out how much inheritance tax is due.
Unless you’re very familiar with tax forms and financial paperwork, IHT400 can be an extremely stressful and time-consuming form to fill out. For this reason, many people choose to use a professional probate service instead.
If you think you may need to pay inheritance tax and want help working out how much is due, call our probate specialists today on 020 3695 2090. We can provide a free, no obligation quote in just a few minutes.
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