Receiving gifts can be exciting for you. But, inheriting an estate in the UK has significantly complex tax liabilities.

What is inheritance tax?

Inheritance Tax is a tax charged on the inherited estate of someone who has died. The estate is your assets that may include your money, savings, investments, property, and possessions. If you plan to pass on your estate to your loved ones after you die, it might attract potential inheritance tax bill to be paid. But, gifting it to your spouse or a civil partner is free from such tax liabilities.

If the deceased British resident has left a will, the executor of such will is usually responsible to arrange the payment of inheritance tax. An estate without a will incur inheritance tax which is payable by the administrator or person in charge of the estate. In such cases, the inherited estate is distributed according to the UK inheritance law.

There are inheritance tax professionals to help you determine and manage your inheritance tax liabilities. You can typically pay the tax by selling the inherited estate. Inheritance tax must be paid right after the sixth month from the date of the estate holder’s death. If you fail to do so, you may need to pay tax interest.

How much inheritance tax you need to pay?

The standard UK’s inheritance tax rate is 40% of the amount exceeding the threshold value, also known as the nil-rate band, of £325,000. So, if your inherited estate is worth below £325,000, you do not have to pay any inheritance tax. For instance, if the value of your inherited estate is £400,000, you will have to pay £30,000 which is 40% on the remaining £75,000.

Apart from your surviving spouse or civil partner, your beneficiaries like charities, communities, and amateur sports clubs are normally exempted from inheritance tax. Also, if you give away your home to your children or grandchildren the threshold amount can increase to £500,000. To calculate your inheritance tax, you must first estimate the worth of your estate.

You can calculate the net current value of your estate by subtract everything you owe from everything you own. Now, subtract this value from £325,000 or £500,000 and calculate 40% of the remaining value to get your exact inheritance tax payable.

How can you reduce your inheritance tax liabilities?

There are various ways to reduce your inheritance tax liabilities like legal tax exemptions and allowances. You can also avail relief on assets like farms, woodland, and business assets which requires you to file a yearly tax return. Every tax year, you can annually distribute gifts worth £3,000 or give away small gifts worth £250 without legally including them in the value of your estate.

Gifting a married couple, investing in pension schemes and donating in charitable trusts are exempted from inheritance tax up to certain limits. Also, any gifts that you have given at least seven years before your death are exempt from inheritance tax.

You may need to pay huge tax bills when accepting some gifts in the UK without the proper knowledge of inheritance tax. Hiring an expert tax consultant will help you create more tax-efficient ways to save your inherited estate.