Inheritance tax can appear to be fairly simple in the way it is calculated; you add up the value of the taxable estate, take off the available nil rate bands, and then multiply by 40% to give you the tax.
But all is not what it seems, and this can be much more complicated than you think. Let us look at the steps:
“..add up the value of the taxable estate,..”
Most pensions are not subject to inheritance tax, but some can be: if you have transferred a pension when ill, or if you have a buyout plan, or if you have not made any expression of wish, money can pass into the estate and have to be added in.
If the estate owns a farm, or a woodland, or a private business, these may be excluded.
What about gifts you have made. Were they Potentially Exempt Transfers (PET), or Chargeable Lifetime Transfers (CLT)? PETs might be traced back up to 7 years, but CLTs and PETs in combination can go back nearly 14 years, so beware!
Alternatively you could have gifted from income, which would be exempt. However, beware investment withdrawals – they are often not income.
“..take off the nil rate bands,…”
The basic nil rate band (NRB) is £325,000, and a deceased spouse’s NRB can be transferred to your credit. But what if you were divorced and remarried – which spouse gets the NRB?
What if a payment was made to a trust?
And what if you’re childless? The residence nil rate band only applies if you have children.
“…then multiply by 40% to give you the tax.”
So the rate is 40%? Unless you get taper relief. Or you have already paid 20%. Or you give 10% of the estate to charity.
Conclusion:
This is not simple. Don’t rely on internet calculators or free guidance pages – get qualified, experienced advice. Make sure you get it right.
