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'I'm a widow and have about $400,000 worth of property. 'Does my son have to pay inheritance tax?'

Following our explanation of how you can prepare your family's finances for a rise in inheritance tax, we received at least a dozen questions from readers asking if their estates would be subject to the tax.

for example…

I am an 80-year-old widow and own a single-family property worth approximately $400,000. My son will inherit my house. Do I have to pay inheritance tax?

Shaz

We've put together some information that will not only answer this, but also cover the basics for anyone with similar questions.

When do I have to pay inheritance tax?

Inheritance tax is levied when you pass on an inheritance of more than a certain value to your loved ones when you die.

If your estate is worth less than the 325,000 threshold or you leave your estate to your spouse, civil partner, exempt charity or organization, you will not be taxed.

The tax is currently levied at 40%, but only on that portion of the estate that exceeds the threshold. To use Shaz's figures as an example, if someone's estate is worth 400,000 when they die, 75,000 of that estate would be taxed at 40% (a total tax of 30,000).

hand over a house

The rules are much the same when it comes to passing your home on to you when you die.

There is no tax payable if you give an inheritance to your spouse or civil partner, but if it passes to someone else under a will, it will be included in the value of the estate.

However, if you fully or partially own your home, leave it to your children or grandchildren, or if your total assets are worth less than $2 million, your tax-free threshold can increase to $500,000.

So, Shaz – I don't think your son will have to pay.

If you transfer your home before you die and live for more than seven years, you generally don't have to pay any taxes.

If you are married or in a civil partnership, keep in mind that any unused allowance you have may be added to your partner's allowance when your partner dies.

This means a couple can pass on up to $1 million in assets without being subject to inheritance tax.

Are there any reliefs or exemptions?

You can claim relief for gifts you made while you were alive, which are taxable even after your death.

If you survive for a certain period of time after the gift, “taper relief” applies. Taxes are assessed differentially on gifts: 32% if the gift is lived for 3 to 4 years, and no tax is levied if the gift is lived for 7 years or more.

You can give gifts totaling up to 3,000 each tax year without adding to the value of your estate. This is called the “annual exemption.”

There are other remedies:

Small Gift Allowance: You can give as many gifts as you want, up to 250 per person, all year long. You just need to check that you haven't already used another allowance for the same person. Weddings and Civil Partnerships: If you want to help someone with a disability, you can donate up to $5,000 to a child, $2,000 to a grandchild, or $1,000 to any other person tax-free. Regular payments: You can make tax-free payments to people who help you. Support is provided for living expenses only if you can afford to pay after covering your monthly living expenses and it comes from your regular monthly income.

When do I pay taxes and how do I pay them?

Inheritance tax must be paid within 6 months of the donor's death. If payment is not made by this time, interest will begin to accrue on the amount due at the Bank of England base rate.

The funds from the estate are used to pay tax to HM Revenue and Customs. This is done by the person handling the estate, known as an “executor” if there is a will.

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