Currently, the standard IHT rate is 40 percent and this is only charged on the part of the estate that is above the threshold. Great effort is usually given to trying to reduce how much IHT is due, even from the government. The government will reduce an IHT bill from 40 percent to 36 percent if at least 10 percent of the total net value of the estate is left to charity. The situation can become even more complicated when factoring shared thresholds with partners, trusts and gifts.
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This could easily be an intimidating process for the average family but thankfully, the government has set up a tool to provide as much assistance as possible.
The government provides an “Inheritance Tax reduced rate calculator” which is designed to help people who are preparing their own will or they’re the executor of the deceased’s will or administrator of their estate.
The tool starts on the government’s website where it details the basic requirements needed and it’ll then bring the user to the HMRC website.
The user will need to have a lot of information handy before starting. It’s detailed that they’ll need to know:
- The value of the assets in the estate
- How the assets are owned
- The total value of the assets in each part of the estate (‘component’)
- The value of any debts and liabilities that must be paid out of the estate
- The amount of any Inheritance Tax relief and exemptions
- The amount of any charitable donations already made
- The value of the threshold (‘nil rate band’)
- The value of gifts the deceased made in the seven years before death
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Once all this information is ready, the user will officially start using the tool on the HMRC website.
A number of text boxes are presented which ask for certain financial information.
There are eight boxes total but only two of them are essential. The boxes that must be completed ask for an inheritance tax nil rate band figure and the total value of assets in component.
The remaining boxes ask for details on gifts made, any possible deductions and the value of all other parts of the estate.
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While this other elements are not essential, completing them will be beneficial as it will provide more detailed results.
The following information could be entered into the essential boxes as an example:
Inheritance Tax nil rate band: £325,000
Total value of assets in component: £500,000
With these details entered, the calculator provides the following results:
Value of component after deductions: £500,000.00
Value of component minus donation to charity: £482,500.00
Inheritance Tax nil rate band applied: £325,000.00
Value of component minus Inheritance Tax nil rate band: £175,000.00
Minimum charitable donation to meet the ten per cent test: £17,500.00
Minimum charity donation required: £17,500.00
£17,500.00 is the minimum charity donation required for this component to qualify for the reduced rate of Inheritance Tax.
This is a simplified example as the actual details for an estate will likely be much more expansive. However, HMRC provide guidance notes for using the tool. In these notes, they expand on all of the information needed with explanations on what they are and why they’re important.
HMRC can also be contacted directly for advice on probate and IHT following a death. They detail that they can help with understanding IHT responsibilities, confirming the forms needed, getting paper copies of forms and completing IHT forms.
IHT is a common part of financial planning and there are many private companies who can also offer assistance. They may be able to arrange estates in a certain manner so that the IHT bill is reduced but there will likely be a fee for these services.
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