Tax on estates at death

When someone dies and the total value of what they own is more than the inheritance tax threshold (£325,000 since April 2009) then tax is payable. Tax is due at 40% on the amount above the threshold. The value of gifts made within the last 7 years must be taken into account when deciding if the inheritance tax threshold has been reached. This is done by adding the value of gifts within the last 7 years to the value of the estate at death.

Example:

Angela dies in December 2012 having previously made gifts to her son of £150,000 in 2009 and of £30,000 to an aunt in 2007. The value of her estate at death is £300,000.

Normally there would be no tax due on an estate of under £325,000, but we need to add in gifts in the last 7 years totalling £168,000 (£180,000 less four annual exemptions – current and previous years deducted from the gifts). This gives a combined value of £468,000 for the estate plus gifts in the previous 7 years.

So inheritance tax is due on £468,000 less £325,000 = £143,000 of the estate at death. The tax rate is 40%. (Taper relief only applies to the tax payable on lifetime transfers which become taxable following a death within 7 years of the gift. In this case the gifts within 7 years of death become chargeable. But they are still below the inheritance tax threshold, so the only impact of the gifts is to increase the tax due on the estate at death).

The value of assets in the estate

Some assets are valued differently for inheritance tax purposes. In particular there are reliefs for business and agricultural property. Reliefs reduce the value of an asset for inheritance tax purposes. There is also quick succession relief, which reduces the tax due where someone dies soon after receipt of an inheritance on which inheritance tax has been paid.

Relief can also be given for fall in value of assets after death. Falls in value of land can be taken into account if they occur within 4 years of death. Relief can be given for some investments where the fall in value occurs within 12 months of death.

Guidance on how to value assets at death can be found on the HMRC website at http://www.hmrc.gov.uk/inheritancetax/how-to-value-estate/index.htm