Inheritance Tax: A Complete Guide | Films4U

Inheritance Tax: A Complete Guide | Films4U

elderly lady talking to a man

A guide to inheritance tax

Facing up to the fact that one day, we could lose someone we love or leave behind a person we care for is difficult. It’s much easier to bury our heads in the proverbial sand and pretend it will never happen.

But if we’re ever faced with this scenario, will we or the people left behind be equipped to deal with it? Inheritance tax in the UK is something of a minefield. To navigate it successfully, it’s important to be familiar with its rules.

In this short guide, we’ll define inheritance tax, explain when and how you’ll pay it and how to calculate it.

What is inheritance tax?

It is a tax on a deceased person’s estate. The amount payable will vary depending on what their estate is worth. This value is calculated by taking into account their property, how much cash they had in the bank, any vehicles they owned, money paid out by life insurance policies, investments, and more. Any liabilities or debts are then deducted. The amount remaining will then have inheritance tax applied to it.

In most cases, estates aren’t big enough to warrant inheritance tax. However, if it is, then this must be made clear in a person’s will – so that the person or people (executors) responsible for the deceased’s estate are fully prepared.

Understanding the threshold

The current UK inheritance tax rate is 40%. This percentage is relevant to anything above the defined tax-free threshold, which is £325,000. 

A note on gifts and trusts

If the deceased gives a gift to someone, inheritance tax may be due if it was given seven years or less before their death. This does not apply to small presents paid from a normal income, which are exempt from this rule. Spousal gifts or presents exchanged between civil partners are also excluded. 

To be charged inheritance tax, the gift will have to be valued at £325,000 or more. In this case, it will be considered part of the estate value.

Do I have to declare inheritance to HMRC?

Even if no inheritance tax is payable, you still need to tell HMRC. That’s why the first responsibility of an executor/assigned individual is to calculate the value of the deceased’s estate and report those findings accordingly.

The responsible person may be asked to fill out a tax return for the period after death. This is not always necessary. It depends on the scale of the tax liability and the complexity of the estate. This is what’s known as a Trust and Estate Tax return. 

Documents and reporting

When declaring IHT, HMRC will need access to specific records to be able to accurately calculate how much needs to be paid. Information about the documents required is listed on the GOV.UK website for convenience.

How is inheritance tax calculated?

To work out if inheritance tax is payable, the below steps must be followed:

    1. Calculate the estate’s ‘gross value.’ To do this, add up the value of its assets. This process isn’t as hard as it sounds and the HMRC have created a calculator to help guide people.
    2. Complete an audit of the estate. A range of factors will need to be considered, including overdrafts, loans, debts, and mortgages. Tax relief given for business assets should form part of your analysis.
    3. Work out which assets are tax-exempt. Certain assets are excluded from IHT, such as money left to charities, or anything gifted more than seven years after the deceased died.
  • Calculate your deductions. Once all the deductions have been made, the resulting amount will determine whether you need to pay inheritance tax. If it is over £325,000, then you will pay 40% tax on anything above this number. For example, if the estate is valued at £450,000, then you will only pay 40% tax on £125,000. 

Apart from the £325,000 limit, there are a couple of other situations where inheritance tax in the UK isn’t applicable.

Inheritance tax is excluded if:

  1. The person who died left everything in their will to their spouse or civil partner.
  2. The inheritance was left to a political party, institution, or charitable cause exempt from IHT rules
  3. Money or property was gifted in line with HMRC guidelines (to a value of less than £325,000).

How much money can you inherit before you pay inheritance tax?

As touched upon earlier, the UK inheritance tax rate is 40%. Separate thresholds exist for single people (£325,000) and couples (£650,000). We’ve already covered relevant exclusions – but what happens if a spouse or civil partner dies, leaving behind their loved one?

If a spouse dies, the inheritance tax threshold can be passed on. This means their unused allowance is added to that of their surviving partners, thereby increasing its value. 

Increasing the UK inheritance tax threshold 

Have you heard of the Residence Nil Rate Band (RNRB)? It’s better known by the catchier name of the Home Allowance. This means that, under certain circumstances, a deceased’s tax threshold can be reduced.

The rule applies if a home is left to:

  • The spouse’s or civil partner’s grandchildren or great-grandchildren or
    • Any children under their guardianship
  • Foster, adopted, or step-children
  • Biological children

The RNRB rule is only valid in cases of estates worth up to £2 million. The current threshold is £125,000 but this figure will increase in phases until next 2021.

What do you do if you inherit money?

As touched upon earlier, the UK inheritance tax rate is 40%. Separate thresholds exist for single people (£325,000) and couples (£650,000). We’ve already covered relevant exclusions – but what happens if a spouse or civil partner dies, leaving behind their loved one?

If a spouse dies, the inheritance tax threshold can be passed on. This means their unused allowance is added to that of their surviving partners, thereby increasing its value. 

Increasing the UK inheritance tax threshold 

Have you heard of the Residence Nil Rate Band (RNRB)? It’s better known by the catchier name of the Home Allowance. This means that, under certain circumstances, a deceased’s tax threshold can be reduced.

The rule applies if a home is left to:

  • The spouse’s or civil partner’s grandchildren or great-grandchildren or Any children under their guardianship
  • Foster, adopted, or step-children
  • Biological children

The RNRB rule is only valid in cases of estates worth up to £2 million. The current threshold is £125,000 but this figure will increase in phases until next 2021.

What do you do if you inherit money?

The last thing on your mind when you’ve lost someone is money. But it’s important to safeguard your inheritance. The course of action you take will depend on your financial circumstances and whether you have dependents.

As a guide:

  1. Seek advice from a financial advisor. They will be able to recommend a clear course of action designed to help you plan ahead for your (and, if applicable) your family’s future.
  2. Pay off any debts you have. For example, you may be able to clear a small loan or reduce the size of your mortgage, depending on how much money you received.
  3. Create a pension fund. Preparing for retirement early is important, as you don’t want to carry on working into your old age.

You may also decide to invest some of your inheritance. The film industry continues to experience growth during this period of economic uncertainty, so this sector could form part of your initial investigations.

We’d love to talk to you

Whether you want to invest some of your inheritance, or are a film financier seeking a new challenge, we’d welcome the opportunity to help. With over 100 years experience, we’re well-positioned to advise you. 


Take a look at some of our past projects and get in touch for an informal chat. Either that, or apply directly using our online application form.

Tags:

Leave a Reply

Your email address will not be published. Required fields are marked *