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The British inheritance tax applies to gifts a donor gives while living and to a decedent’s estate. You can apply several exemptions to lower or offset the inheritance tax liability. The tax must be paid within six months from the end of the month in which the decedent died. You can request to pay the tax in yearly installments if you can't pay it all at once. If not, interest will be assessed on the outstanding tax amount.
Estate Inheritance Tax Threshold
Before the inheritance tax can be imposed, the value of the decedent's estate must exceed the threshold amount. For tax years 2013 and 2014, the threshold amount is approximately $496,000 (£325,000). Anything over the threshold amount is taxed at a flat 40 percent. That rate falls to 36 percent if the decedent left 10 percent or more of the assets to a qualified charity. The surviving spouse or civil union partner can add the decedent’s unused threshold amount to theirs for a maximum of $992,000 (£650,000).
Estate Inheritance Tax Exemptions
If the decedent’s estate exceeds the inheritance tax threshold, the inheritance exemptions and relief may reduce the value below the threshold. Any gift you make to your spouse or civil partner aren't included in your estate. Likewise, gifts made to a qualifying charity aren't part of your estate. Gifts made using the annual $3,000 gift tax exemption or $250-unlimited small gift exemption aren't counted as part of your estate.
Calculating Estate Inheritance Tax
Calculating the estate inheritance tax begins with gathering and totaling all of the decedent’s assets plus the assets the decedent placed in a trust. The decedent’s liabilities are subtracted from the total assets. Any applicable exemptions are used to reduce the net value of the estate. If the net value of the estate is below the inheritance tax threshold, no tax is due. If the net value of the estate exceeds the threshold, the amount is taxed at 40 percent.
Calculating Chargeable Transfer Tax
Gifts made by living donors are known as chargeable transfers. Chargeable transfers are taxed at 20 percent of their value. The gift’s value is based upon the amount of loss to the donor’s estate. For example, you own two statues that are worth $20,000 together. Each statue is worth $7,000 individually. If you gift one of the statues, the inheritance tax value of that gift is $13,000 ($20,000 minus $7,000). The inheritance tax that is due on the gift is $2,600 ($13,000 multiplied by 20 percent).
- Her Majesty’s Revenue & Customs: Inheritance Tax – The Basics
- Her Majesty’s Revenue & Customs - Transferring an Unused Inheritance Tax Threshold
- Her Majesty’s Revenue & Customs - Gifts That Are Exempt From Inheritance Tax
- Her Majesty’s Revenue & Customs - Valuing an Estate for Inheritance Tax - Worked Example
- Tax World: Inheritance Tax Liability – Chargeable Transfers
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