Your executor(s) or administrator(s) will be responsible for the payment of any tax due on your death. This can include any outstanding income tax (on your earnings before death), capital gains tax and inheritance tax.
If your estate is worth less than £325,000, there is no inheritance tax. If your estate is worth more than this, however, inheritance tax at 40% may be payable. (This is reduced to 36% if more than 10% of the estate is left to charity.) Your executors will not normally be able to obtain probate and start distributing your bequests until HM Revenue & Customs have received some or all of the required inheritance tax.
In establishing the value of the estate, HM Revenue and Customs will require the inclusion of:
- personal effects of any value, for example your car(s), paintings, jewellery, antique rugs or furniture
- your house
- any other property
- any investments
- the contents of your bank and savings accounts
- the proceeds of any life assurance policies (other than policies ‘written in trust’ for other people)
- gifts – apart from those made under the annual allowances (see below) – made within the past seven years
- in some cases, trust property from which you benefit
- foreign property
Since April 2017, your personal home will benefit from a transferable nil-rate band when it is passed to a ‘direct descendant’ (including step-children). The allowance is being phased in and will be worth £175,000 by 2020/21. This will give a potential inheritance tax threshold of £1 million for married couples by 2020/21, but the nil-rate band gradually reduces for estates with a value of over £2 million.
If you own assets jointly on your death, such as your house or a joint bank account, there are rules that determine which proportion of those assets is treated as part of your estate for the purposes of calculating its value for inheritance tax purposes. Usually, if you are one of two joint owners, you are treated as owning half, if one of three, a third, etc.
Furthermore, the following are deducted from the value of your estate when calculating inheritance tax:
- your debts, if any (including, for instance, closing bills from the utility companies)
- the costs of your funeral
- any gifts to your spouse (or civil partner)
- any gifts to a registered charity
- any gifts ‘for national purposes’
- wedding gifts: up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else
- gifts of up to £3,000 to any one person in any one year
- gifts of up to £250 in any one year to any number of people
- regular gifts or payments out of income (ie gifts that were made without needing to dip into your capital)
- gifts made more than seven years before your death