Inheritance tax has long been the subject of heated debate, but the chances of it being repealed any time soon, is very remote. So for most people, the choice of creating a financial plan to deal with it or leave your loved ones to foot the bill is pretty important.
Under current rules transfers of assets between spouses and civil partners are (usually) ignored for the purposes of any tax, including inheritance tax. Each individual can leave an estate of up to £325K to any other individual or organization before Inheritance Tax becomes payable.
Inheritance Tax is levied at a flat rate of 40% (with a reduction of 4% where the deceased has left at least 10% of their assets to charity).
Any unused portion of this allowance can be transferred to the surviving spouse/civil partner as a percentage. For example £162.5K would be transferred as an allowance of 50% extra. This means that the surviving spouse/partner would be able to leave a tax-free estate consisting of their own personal allowance plus an extra 50%.
Looking at these figures and comparing them with house prices, it’s easy to see that many home owners could find their estate subject to inheritance tax.
Inheritance Tax Must Be Paid Before The Estate Is Released
Upon a person’s death, their executor must inform the Inland Revenue of the value of that person’s estate. They will then receive a formal notification of how much tax is due. In general, this must be paid within 6 months of the deceased’s death. If it is not the Inland Revenue will charge interest on the outstanding balance. Although the payment can be made out of the deceased’s estate, it must be made before the bulk of the estate is released.
There is an exception for funeral expenses, although the bank or building society must agree to allow the executor access to the account. If they do not, these can be recouped from the estate and can be deducted from its value for tax purposes. Added together this can all mean that families who have worked hard at money management to put their family finances in good order can find themselves under tremendous financial pressure at a time when they are likely to be feeling highly emotional.
Planning ahead with the help of a financial adviser can help to minimize the stress of dealing with a bereavement.
Life Insurance Can Be A Lifeline
Life insurance can be a very efficient way to ensure that there are funds readily available to cover Inheritance Tax and funeral expenses. Rather than naming an individual as a beneficiary of the policy, the holder can request that the eventual payout be made into a trust, held on behalf of your preferred beneficiaries.
In this way, the funds will be kept separate from your estate and can be released immediately (and relatively simply). This can also help to ensure that a surviving partner and/or children have sufficient funds to live comfortably while probate is being undertaken.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.