Last month, the UK said goodbye to a national treasure, as singer and comedian Ken Dodd passed away after a severe chest infection. Two days before his passing, however, he and his partner of forty years, Anne Jones, decided to marry. It has been said that Dodd has “had the last laugh” as doing so would ensure that Anne doesn’t lose £2 million in inheritance tax. It is important to note that Ken Dodd made a Will leaving his estate to Anne.
What is Inheritance Tax and how much is it?
Inheritance tax (IHT) is a tax on the estate of whoever has died. There are a few circumstances IHT is not paid, such as if the value of your estate is below the threshold of £325,000, you leave everything to your spouse or civil partner or if you leave everything to an exempt beneficiary such as a charity. If the value is above the nil rate band (NRB) of £325,000, then part of your estate above this will be liable for the tax rate at 40%, which is fixed until 2021.
The home allowance, or RNRB, has recently been introduced. This is on top of the nil rate band. In order for this to apply you must pass your home or a share of it to your children or grandchildren.
Given certain conditions are met, the home allowance gives you an additional allowance to be used to lower the IHT against your home. At the moment, the home allowance is £125,000 but is set to rise to £175,000 by 2021 and will be in line with the consumer price index from then on.
Valuing your Estate
To value an estate you must first devise a list of all assets and calculate their value at the date of death, and deduct any debts and liabilities. It is important to keep record of how you calculated it, such as estate agents valuation. HMRC are entitled to request a viewing of the records up to twenty years after IHT is paid.
Assets include banked money, property and land, valuable possessions, insurance policy pay-outs and jointly owned assets. Gifts must also be included, such as cash or other assets, if they were to be given away in the seven years before the individual has passed. Gifts given to the deceased before this period must also be included if they continued to benefit from it, such as if they were to give their house way but continue to live in it up until death. These are also known as “gifts with reservations of benefit.”
Who Pays Inheritance Tax?
If there is a Will, it will be the executor who arranges to pay the IHT. If not, it will come down to the administrator of the estate. IHT is normally paid from funds within the estate, or from sales of assets if the estate has no cash. There are also times where the deceased has left money in the estate to pay this tax, or may have arranged for a life insurance policy to cover the bill.
When do you pay Inheritance Tax?
IHT must normally be paid within six months of the person’s death. After that there will be an interest charge from HMRC, regardless of if the executor chooses to pay by instalments over the years. If the Asset is sold before IHT is paid, the executors must ensure all instalments and interest are paid by then.
If your estate is likely to incur IHT, it’s ideal for the executor to pay some tax within the first six months of death to avoid paying interest for late payment.
Using Life Insurance to pay Inheritance Tax
Taking out a life insurance policy to pay some or all of your IHT bill can give you peace of mind you’re not passing down a big tax bill to your family and friends when you pass away. If you choose to do this, it is important to ensure you take advice before making any decisions. You will only reduce IHT on your estate if your life insurance policy is written in trust during your lifetime. If not then the policy proceeds will count towards the value of your estate and be liable to IHT on your death.
The importance of having a properly drafted Will
If you die without making a Will, you will die intestate. In these circumstances, your estate may not automatically pass to your spouse in its entirety. The rules relating to inheritance tax are therefore different and your loved ones may end up paying more tax than they would have to had you had a properly drafted Will.
If you have not yet had a Will drafted or your circumstances have changed since your Will was drafted, our specialist Wills & Probate Solicitors can advise you in relation to your Will and the planning of your estate. Should you be unable to travel to one of our offices, Claire and Ivana will be happy to visit you at home.