When you die, your estate--the property you leave after you die--must be legally valued and probated. In most cases this is a reasonably straightforward process. A will has been left and is executed swiftly and all the inheritance tax due is paid. However, the process can linger if the deceased has not left a will, has complex or disordered personal affairs, or the will is contested. The majority of inheritance law regards tax issues.
If you die without leaving a will, you are said to have died intestate. Contrary to popular belief, in situations such as this the estate does not automatically go to your spouse or civil partner. Under the laws of intestacy, your estate will be split up and distributed according to value and the set rules that determine the recipients.
In the UK, you will pay inheritance tax if your estate--the property you leave after you die--is valued above the inheritance tax threshold. The threshold is set at £325,000 GBP as of 2010. This includes assets held in trust and gifts you made up to seven years before death. The inheritance tax rate is 40 percent on any amount over the limit.
Remember, the vast majority of people don’t pay inheritance tax. With careful long-term planning and expert advice, it’s possible to significantly reduce your inheritance tax liability.
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Spouses and Civil Partners
Generally, no inheritance tax is due on anything the deceased leaves to a wife, husband or civil partner who lives permanently in the United Kingdom. Any gifts given to a spouse or civil partner before death are also exempt, even if the amount exceeds the inheritance threshold.
Valuing Your Estate
Your estate is the whole value of the assets that you own, or own jointly, when you die. To understand how much inheritance tax is due, it’s necessary to value the estate. It is up to the trustees or executor of the will to oversee this process. It can sometimes be tricky and convoluted if the deceased has a complicated estate. The value of the estate includes real estate, stocks and all other property held by the deceased.
Numerous exemptions are available when a person dies and these can help you plan to reduce your beneficiaries' tax bills. Fifts to charities during your lifetime or in your will are not taxed. Gifts you give to people getting married or having a civil partnership are also normally exempt. If you own a business, a heritage property or woodland you can expect a reduction in taxes on those.
Paying Inheritance Tax
Inheritance tax must be paid six months after the month in which the person dies. This allows time to value the estate and measure the tax liability. At the end of the six months you will have to supply HMRC (the UK tax authority) with all the relevant information. It’s strongly advised that you engage a solicitor who is an expert in inheritance issues to make sure that you meet your legal requirements. You can pay the full sum or arrange to settle in installments. HMRC recommends that you pay the amount by bank transfer.
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