Inheritance Tax and How to Avail Exemptions Over It

The major reason for taxation is to make sure that the government has enough money in its coffers to run the country properly. These taxation range from a consumer taxation to charges levied on the services and the property transfers.

HMRC Inheritance

What is inheritance tax?

The estate and the belongings of a person are transferred to their declared or the legal heirs after the original owner has died. This transfer of the property is referred as an inheritance. The heirs are required to pay taxes at the time of claiming the property and assets. This tax levied on all the individual heirs on the basis of the value of their inheritance is known as HMRC inheritance tax.

This tax is also termed as Death Duty after the deceased’s estate and belongings are being claimed by the legal heirs. The value of the estate must be excess of 325,000 euros, for the heirs to be liable for paying the tax; any inheritance with a cumulative value of less than this threshold is exempted from this duty. The threshold is compared to paying up all the debts and the other arrangements regarding the funeral bills, etc.

The original tax rate for inheritance tax is 40%, but it may vary according to the heir as well as the value donated to the charitable costs. Gifts given in the period of seven years before the death can also be brought in the calculations if the value of gifts is more than 3,000 euros annually.

The difference between an estate tax and an inheritance tax:

  • The confusion between an estate tax and inheritance is justifiable because of the generally similar terminologies and the payment modes. The taxpayers should have clear knowledge about both these taxes and also the differentiation between the two to make correct tax planning.
  • The value of the estate tax is calculated over the entire valuation of the estate, while in the case of inheritance tax, the calculations are made in light of the value of portion inherited by the individual heirs.
  • The estate tax is payable by the executor or the owner of the estate; its burden falls on the heirs only when the value of estate is not enough to pay the taxes. In the case of inheritance tax, the amount payable is the requirement of the individual heirs.
  • The value of estate tax is calculated on the valuation of the estate and therefore, is a constant one. But in the case of inheritance tax, the value of tax is also dependent on the closeness of the relation of the heir with the deceased; the distant relatives getting the inheritance are required to pay more taxes.

How to avail exemptions on inheritance tax?

While the inheritance tax is payable by the heirs of the property, there are some rules through which an heir can avail partial or even complete exemptions from the tax payment. Some of the most popular measures are listed below.

  • First and foremost, condition of the inheritance tax payment is it getting to the threshold value. If the value of the estate is less than 325,000, then the heirs are not required to pay any inheritance taxes. Therefore it is essential for the heirs to get the valuation correctly, so as to avoid any excessive taxation.
  • This tax is payable by any relative taking control of the estate and the belongings, but the rule states that the tax is not payable if the estate is being transferred to the spouse of the deceased or the civil partner. This is a good way to avoid taxation by HMRC resources. This is especially preferred by those heirs who have one living parent. The estate is automatically transferred to the spouse in case of the death of the actual owner, and there is no tax levied over it. This way the tax obligation is postponed for some time.
  • While the regular tax rate is at 40%, it can be reduced to 36% if the deceased has donated a certain amount of the estate value to charity. Most of the businessmen take up this method as it ensures that their heirs have to shell out less money as taxes at the time of estate claiming. This also has an advantage in the hindsight. The families that make social donations are entitled to social respect and stature, which is generally attached with the family name. This social stature comes with no tax obligations whatsoever.
  • If the heirs have been living abroad for more than 3 years in the last 20 years, then they are exempted from paying the taxes.
  • Any inheritance that is beyond the national borders is not liable for any tax payment. The heir can claim that property without having to pay anything to the UK government; the rules for the country where the property is located are applicable in this case.
  • According to the law, if the property is handed over by the owners at least 7 years before their death, then there is no tax obligation attached to it after their death. This is one of the most-suggested methods of saving on the inheritance tax as it allows the family inheritance to remain in the family, while also ensuring the legality of it.
  • The money held in the foreign accounts and holdings are not liable to inheritance taxation. This is a major reason why most of the big firms run by families are keen to invest in the foreign assets. The value of those assets is likely to appreciate over time; and whenever the time of ownership transfer comes, there is limited or no tax liability attached to it.
  • The estate owner can distribute the assets amongst the heirs in a way that the value of each faction is not more than the threshold of 325,000 euros. This would protect the heirs from having to pay the tax. This method works particularly well in the families with close bonding.

Many people have issues with taxation on the inheritance claims, but it is actually aimed at keeping the money in the flow and also promoting entrepreneurship amongst the citizens. It is also understood that the value of assets being inherited might have efforts from the heirs as well, and this is the reason behind giving up so many chances to avail the exemptions.

Source: DNS Accountants

Share:


Categories: Business Finance, Financial Accounting, Accounting

Tags: estate tax, inheritance tax, pay vat online, paying hmrc vat, vat hmrc, vat payment details


Related Video

Additional Images

About DNS Accountants

View Website or Media Room

DNS Accountants is an award winning UK based accountancy firm that provides full range of accountancy services, payroll accounting, bookkeeping, self-assessment tax return, year-end accounting service to contractors/freelancer across the UK.

DNS Accountants
Pacific House (382 Kenton Road)
Harrow, Middlesex HA3 8DP
United Kingdom