Inheritance tax is sometimes called a 'voluntary tax' by accountants simply because there is so much you can do to reduce its effect. After all, as American author and statesman Benjamin Franklin is reported to have said 'In this world nothing can be said to be certain, except death and taxes.' You can't do anything about the first, but prudent planning can reduce the pain of the second.
But what? What is Inheritance Tax? When is it paid?
Hopefully, we can answer some of your questions:
Q: What is Inheritance Tax?
A : Inheritance tax, previously known as estate duty or capital transfer tax, is the tax payable on your estate when you die and on certain lifetime transfers. Your estate is basically everything you own... all your assets minus anything you owe.
Subject to certain other exemptions and reliefs, the tax is levied at a flat rate of 40% on anything above the Inheritance Tax nil-rate threshold in the year in which you die. In the 2001-02 tax year, the threshold is £242,000. So, if your estate is found to be worth £250,000 then the Inheritance Tax payable would be 40% of £8,000 :- or £3,200.
Q: What does my estate consist of?
A: As far as Inheritance Tax is concerned, your estate consists of what you own minus what you owe. There are some inclusions and exclusions, however. One which might surprise you is that ISAs, Peps and Tessas - though tax free when you are alive - lose their exemption on your death and become part of your estate. Property which you own jointly is not usually regarded as an asset of your estate although may be subject to Inheritance Tax if the co-owner is not your spouse. Discretionary payments from pension funds, such as death in service, do not usually form part of your estate either.
Q: When is Inheritance Tax payable?
A: When you die, the assets in your estate are calculated.. then, any Inheritance Tax owed by your estate must be paid before your assets can be given to any of your beneficiaries. The tax is usually payable within six months from the month in which death occurred, otherwise interest is payable on any of the tax owed. However tax on some assets, including property, can be deferred and paid in instalments over 10 years. The amount of your estate that is free from Inheritance tax depends specifically on what the nil-rate threshold is at the time of death.
More information:
Inheritance Tax Planning
Inheritance Tax
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