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Setting up a limited company - Inheritance Tax

Inheritance Tax is a tax on the estate of someone who’s died.

To find out if Inheritance Tax is due on an estate, you must first value the estate. This means adding up the value of all the assets in the estate - such as a house, possessions, money and investments - and deducting any debts the deceased may have owed, including household bills and funeral expenses.

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An estate also includes the deceased's share of any jointly owned assets and the value of any assets held in trust. You should also review any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren't exempt, include them in the overall value of the estate.

There’s normally no Inheritance Tax to pay if either:

  • the value of your estate is below the £325,000 threshold
  • you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

If the estate’s value is below the threshold you’ll still need to report it to HMRC.

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £950,000.

Passing on a home

You can pass a home to your husband, wife or civil partner when you die. There’s no Inheritance Tax to pay if you do this.

If you leave the home to another person in your will, it counts towards the value of the estate.

If you own your home (or a share in it) your tax-free threshold can increase to £475,000 if:

  • you leave it to your children (including adopted, foster or stepchildren) or grandchildren
  • your estate is worth less than £2 million

Giving away a home before you die

There’s normally no Inheritance Tax to pay if you move out and live for another 7 years.

If you want to continue living in your property after giving it away, you’ll need to:

  • pay rent to the new owner at the going rate (for similar local rental properties)
  • pay your share of the bills
  • live there for at least 7 years

You do not have to pay rent to the new owners if both the following apply:

  • you only give away part of your property
  • the new owners also live at the property

If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and the 7 year rule applies.

Inheritance Tax rates

The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.

Example Your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).

The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will.

Reliefs and exemptions

Some gifts you give while you’re alive may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%.

Who pays the tax to HMRC

Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will).

Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.

People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.

Inheritance Tax exemptions and reliefs

Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax.

Examples include:

  • Spouse or civil partner exemption. Your estate usually doesn't owe Inheritance Tax on anything you leave to a spouse or civil partner who has their permanent home in the UK - nor on gifts you make to them in your lifetime - even if the amount is over the threshold.
  • Charity exemption. Any gifts you make to a 'qualifying' charity - during your lifetime or in your will - will be exempt from Inheritance Tax. A donation to charity in your will may also reduce the rate that tax is paid at (see more in the link below).
  • Potentially exempt transfers. If you survive for 7 years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.
  • Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount - you can also use your unused allowance from the previous year but you use the current year's allowance first.
  • Small gift exemption. You can make small gifts of up to £250 to as many individuals as you like tax-free.
  • Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.
  • Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.

In most cases, you must pay Inheritance Tax within six months of the end of the month in which the deceased died. After this, interest will be charged on the amount outstanding. You can pay in yearly installments over 10 years if the value of the estate is tied up in property such as a house.

For further guidance, speak to one of Orange Genie Accountancy's contractor accountants today 01296 468 185 or email accountancy@orangegenie.com.

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