What is Inheritance tax?

Inheritance tax is paid on the estate of a person who has died. A person’s estate can include property, money, shares, insurance policies, pensions etc. Any assets that can add value to an estate should be considered when working out tax.

Do I have to pay inheritance tax?

Not every estate has to pay inheritance tax. It depends on the value of the estate and whether additional tax allowances can be applied. An estate is eligible to pay inheritance tax if the estate’s value is over the tax-free threshold.

Everyone is entitled to a tax-free threshold of £325,000. In certain circumstances, additional allowances can be applied to increase that tax-free amount. These additional allowances include a spouse’s transferable nil rate band and the transferable residence nil rate band. If the total value of an estate is below the threshold or combined threshold there is normally no tax to pay.

When do you have to pay inheritance tax?

Some or all of the inheritance tax must be paid within six months of the person’s death. Inheritance is paid during the probate application stage of the administration of the estate. If it is not paid HMRC will start charging interest. The executor/administrator is responsible for ensuring that the inheritance is paid from the estate.

There is normally no inheritance tax to pay if you leave your entire estate to a charity or a community amateur sports club.

Do spouses pay inheritance tax?

There is not normally any inheritance tax to be paid when you pass your entire estate to your spouse. However, your spouse’s estate may be liable for inheritance tax if by inheriting, the value of their estate goes over the tax threshold after additional allowances have been applied.

Do beneficiaries of a Will have to pay inheritance tax?

Ordinarily, the estate is responsible for paying the inheritance tax, not the beneficiaries. However, beneficiaries can take on the responsibility for paying inheritance tax if they choose to inherit an asset rather than have it liquidised (turned into cash) and used to pay the tax due.

For example, if there is a property in the estate that could be sold in order to pay the inheritance tax but the beneficiary would like to retain the property. The beneficiary will need to pay the inheritance that can’t be paid because they have chosen not to sell the property.

Beneficiaries may also have to pay inheritance tax if they received a gift of over £3000 whilst the deceased was alive. If the deceased’s passes away within 7 years of making the gift, and their total estate is over their threshold, the beneficiary may have to pay a percentage of tax on the amount they received.

What is a nil rate band?

The nil rate band (nrb) is the amount that can be passed in inheritance to beneficiaries without inheritance tax being due. Every estate has a nil rate band and is entitled to pass a certain amount without tax being payable.

The current nil rate band (as of 2020) is set at £325,000.

What is a transferable nil rate band?

When you leave your estate to your spouse you pass your £325,000 allowance onto them. This is called a nil-rate band transfer. Any unused allowance can be added to their threshold upon death. Therefore, upon the second death, the deceased’s £325,000 allowance will be used, and the predeceased partners allowance can be added, giving a higher threshold of potentially £650,000.

What is the residential nil rate band?

The residential nil-rate band (rnrb) was introduced in April 2017, this allows an extra £175,000 tax-free allowance to be used when a property is being passed to children or grandchildren. As with the nil rate band, any transferable residential nil rate band can be passed between spouses, resulting in a potential non-taxable allowance of £1,000,000. (£325,000 + £325,000 +£175,000 + £175,000).

Some estate’s may be eligible for business relief or agricultural relief. However, these areas can be extremely complicated, and it is highly recommended that you seek the advice of a professional.

How much is Inheritance Tax?

Inheritance tax is charged at 40% but only on the amount that is above the threshold.

For example, on an Estate worth £400,000 using a singular allowance of £325,000, inheritance tax would be payable on the £75,000 that is over the allowance. Therefore 40% of £75,000 would be £30,000.

In some cases, you can pay Inheritance Tax at a reduced rate of 36% on certain assets if you leave 10% or more of the ‘net value’ of your estate to charity in your will.

Who is responsible for paying inheritance tax?

It is the duty of the executor or administrator of the estate to work out how much tax is payable and ensure that it is paid to HMRC.

In most cases, Inheritance Tax is paid out of the deceased’s estate before it’s distributed to the heirs. Therefore, the beneficiaries will not have to pay additional tax on what they inherit.

However, there are some cases where a beneficiary will have to pay tax related to what they inherit, for example, if they inherit a rental property, they would pay tax on the rental income.

People who have received gifts of £3000 or more within 7 years of death may also have to pay inheritance tax on any gifts if the deceased’s estate is more than £325,000. However, depending on when the gift was given can affect the amount of tax payable. This is called ‘Tapered Relief’ meaning you will pay less tax on a gift given 5 years prior to the death than you would on a gift given 1 year prior to death.

How do you pay inheritance tax?

IHT can be paid from cash funds in the estate, for example, cash in bank accounts or ISA’s or from money raised from the sale of the estate’s assets, for example, property.

In most cases, inheritance is paid through the Direct Payment Scheme (DPS). This scheme allows for some or all of the tax to be paid directly from the deceased’s banks, building societies or National Savings & Investments (NS&I). In other cases, inheritance tax may be paid from an insurance policy that the deceased held.

You can pay inheritance tax in instalments if the estate is made up of assets that need to be sold. It can take some time to sell the assets, but you must pay the tax once the assets are sold. You will most likely have to pay interest on the instalments.

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