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How is inheritance tax calculated?

After someone has died, the executor of the person’s will is responsible for calculating and paying any inheritance tax that may be due to HMRC. According to HMRC figures, the vast majority of people do not have an inheritance tax liability when they die, with only 3.1% of estates in 2012-13 actually having to pay the tax. Nevertheless, considerable amounts of inheritance tax are paid from estates, with a total amount of some £3.8 billion collected by HMRC in 2014-15.

A properly constituted will should name an executor or executors. Where there is no will, an administrator must be appointed to take on the role of executor. Both executors and administrators are responsible for obtaining probate and for dealing with inheritance tax matters.

Inheritance tax is only due on estates worth more than £325,000, so it is essential to accurately work out the net value of an estate. To do this, you first need to collect information about the assets including property, cash in bank or building society accounts and personal possessions such as jewellery, artworks and antiques. You should also include gifts that the deceased has made in the seven years prior to his or her death as these can also count towards the value of the estate. Gifts made more than seven years before the death are tax exempt.

HMRC recommend that you use the services of a professional valuer for any items in the estate that are worth more than £500 at the time of the person’s death. Great care must be taken when valuing the assets of the estate as HMRC will challenge any valuations that they believe are too low. Obviously, you also want to avoid over-valuing assets as this may lead to an increased tax bill.

Once you have calculated the total worth of the estate, you then need to work out the liabilities. These may include bank loans, utility bills, mortgages on property and credit card balances. You can also include the cost of the funeral.

Once you have the total of the liabilities, you subtract this from the gross value of the estate to get the net value. This is the figure that HMRC will use to calculate any inheritance tax that is due.

Inheritance tax is due at 40% on the value of the estate above the £325,000 threshold. This can be reduced to 36% when 10% or more of the estate has been given to charity. The deadline for paying inheritance tax is the end of the sixth month after the person died.

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