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Help with Inheritance Tax

Inheritance Tax (IHT) Guide

Previously known as death duties, inheritance tax (IHT) was introduced in 1986, replacing Capital Transfer Tax. It is the amount payable to Her Majesty’s Revenue and Customs (previously Inland Revenue) when someone inherits assets of high value, be it money, assets such as paintings, or any other type of property from a person who has died. In other words, inheritance tax is a form of taxation imposed on the transfer of assets from one person to another upon death.

How do current house prices in 2022 affect IHT liabilities?

Inheritance tax-liable estates are increasing. Be aware of how this may affect you.

The government has not increased the threshold for inheritance tax or the rate of the tax since 2009. As property prices have risen considerably over the same period, many more estates have become liable for inheritance tax or IHT. The government’s own figures show that the average UK house price in March 2022 was £278,436. In England alone, the amount is nearer £300,000, therefore very close to the threshold at which IHT tax must be paid.

Quick links:

  1. How Inheritance Tax Works
  2. When to Include a Professional
  3. Paying Inheritance Tax
  4. Practical Examples of Inheritance Tax Liability
  5. How Inheritance Tax Works in Marriage or Civil Partnerships
  6. How Inheritance Tax Works in a Family
  7. What if some of the estates are being left to charity?
  8. What is the 7-year rule referring to?
  9. Other Taxes to Pay on an Estate
  10. Get Help with Inheritance Tax

How Inheritance Tax Works

When do you need to pay inheritance tax?

IHT must be paid on all estates of individuals who have died with a value over a certain threshold which is called the Nil Rate Band (NRB). This is currently £325,000, although some situations exempt tax from being paid. The estate’s total value is taken when calculating the inheritance tax to be paid, whether the value is made up of money or physical assets such as jewellery or buildings.

IHT has to be paid in exactly the same way regardless of whether the deceased person has left a valid Will or not, i.e. the estate is ‘intestate’.

Inheritance Tax Laws and Rules in the UK

The difference with intestacy is who benefits from the estate. However, because the rules of intestacy define how the estate is divided, this may mean that IHT does have to be paid. There are slight differences in the allowances that can reduce the inheritance tax to be paid in Scotland.

If you need help, call the National Bereavement Service helpline for free* at 0800 0246 121 and we can offer support.

Rules in Scotland & Northern Ireland

The rules regarding IHT are the same throughout the whole of the UK because most of the tax rules are not devolved, even though probate is dealt with differently in Scotland (slight difference in the allowance), where it is called ‘confirmation’ and probate in Northern Ireland. There are no differences between England and Wales in how probate is done.

What if the value of an inherited estate is below the Inheritance Tax threshold?

If you know, without any doubt, that the estate of the person who has died is significantly under the IHT threshold, we would still advise you to read through the rest of the information on this page in case other factors apply such as events during the lifetime of the person who has died.

Until the beginning of 2022, you still needed to complete an IHT 205 to prove to HMRC that no inheritance tax needed to be paid. This form has now been abolished and you can just apply for the grant of probate/letters of administration.

When to Include Professionals

When formal valuations of an estate are needed

You should obtain a professional valuation for any item or items which together are worth more than £1,500 and also for any properties.

Can I deal with the estate myself or must I use a professional if IHT has to be paid?

It is possible to do this yourself, but we always recommend using the help of a professional to administer an estate over the inheritance tax threshold or where there are likely to be any challenges made by other beneficiaries or from individuals that are excluded from the will.

How can a professional help?

There are various allowances that may reduce the amount of tax that needs to be paid. This is more difficult for someone that is not legally qualified or experienced in probate law, there are events that may have happened during the lifetime of the person who has died which means that, even if the estate seems to be below the IHT threshold at the time of the death, IHT may still need to be paid.

Get help with IHT 400 and paying inheritance tax

A personal representative (PR) (an Executor/Administrator) who incorrectly completes the IHT 400 or fails to pay IHT that was due, even if by accident rather than deliberately, is still personally liable for the error. This liability continues even after the death of the PR and if there is more than one PR the liability is on each individually and collectively as one action binds them all.

Paying IHT

Deadline for paying inheritance tax

IHT has to be paid before the Grant of Representation (i.e. the Grant of Probate or the Grant of Letters of Administration) has been applied for. It becomes due 6 months from the end of the month of death and must be paid for in full unless there is any option to pay by instalments. Any delay in payment will be charged interest by HMRC, as will outstanding instalments. If IHT has still not been paid a year after the death, a late payment fine will be added to the amount due.

There is an exception to this rule when payment by instalments may be arranged if any part of the value of the estate is in the form of a property or business assets. The first instalment needs to be paid before the 6-month window closes and the remaining instalments are due each year thereafter for 10 years or until the asset is sold.

How to pay IHT

  1. The person responsible for dealing with the estate, i.e. the executor (a valid Will) or the administrator (no valid Will/intestacy) has to complete Form 400 with all the details of the estate and send this to Her Majesty’s Revenue & Customs (HMRC).
  2. HMRC will check the calculations that you have used to estimate the value of the estate to be inherited.
  3. You need to obtain an IHT reference number from HMRC before you pay the tax.
  4. Once you have submitted the IHT 400 you have to wait at least 20 days before submitting your application for a grant of probate/letters of administration to the Probate Registry.

Common Inheritance Tax Situations

How does inheritance tax (IHT) work when the deceased person was married or in a civil partnership?

Note: by civil partnership we mean a partnership made in front of a Registrar. We are not referring in any case to cohabiting partners.

If a surviving spouse (husband or wife) or civil partner is to inherit the entire estate, they do not have to pay inheritance tax. When they eventually also die, their nil rate band allowance is carried forward and applied to their estate. Therefore, if no other factors apply, the IHT is only payable on the value of the estate over £650,000. Please note this does not apply to cohabiting partners, not in a legally confirmed relationship.

If the estate is over this threshold but includes a residence that passes to direct descendants (a legally defined term) then up to £1 million may be inherited free of IHT.

How does inheritance tax (IHT) work in a family?

If a Will divides an estate between a surviving spouse/civil partner, the surviving partner will not pay IHT. However, if the total value of the estate is over the inheritance tax threshold, tax may need to be paid on the part of the estate not left to the spouse. However, by leaving only an amount over this nil rate band, it may not leave adequate provision for the partner and might lead to a costly and time-consuming dispute. If the estate is over the threshold there may be ways to avoid a trigger to IHT and legal advice is recommended to be sought (this links in with Deeds of Variation/deeds of family arrangement).

How does inheritance tax (IHT) work without a valid will?

The nil-rate band (NRB) still applies to the portion of the estate of the will that is not inherited by a surviving spouse/civil partner when the rules of intestacy apply. However, because the surviving spouse/civil partner will only be inheriting a portion of the estate of the deceased person if there are surviving children in the relationship, IHT may still have to be paid.

Inheritance Tax FAQs

Is there a difference between inheriting properties or an estate?

Inheriting a person’s estate means their entire assets including property in the form of buildings. Liability for IHT is based on the entire value of the estate less any outstanding debts existing at the date of death unless an exemption applies.

How does inheritance tax (IHT) apply to a joint property?

With a property such as a home or land, the ownership is easier to prove by looking at the deeds or Land Register as the legal title will either show ownership as tenants in common (with a restriction on the title showing the division of the shares owned by each in equal/unequal shares) or as beneficial joint tenants.

If it is owned as a beneficial joint tenancy, i.e., the parties own the property together in undivided shares, the property passes entirely to the survivor(s).

If it was owned as tenants in common, only the proportion of the property owned by the deceased person is part of the estate to be inherited, but the other owner(s) don’t automatically inherit, and the inheritance will be determined by the will/intestacy of the deceased individual.

How does inheritance tax (IHT) apply to a joint money or assets?

Jointly held assets can be held in two different ways: as joint tenants or as tenants in common. Assets automatically pass by survivorship to the co-owner as a joint tenant but not to the tenant in common. The way such assets are inherited will be determined by the will/intestacy.

It is assumed that most bank accounts are held as joint tenants and therefore pass entirely to the survivor automatically, but sometimes the legal ownership can pass to the survivor, whereas the actual entitlement to the contents of the account can remain either fully or partially within the estate of the person who has died.

For the purposes of valuing the estate, the PR (administrator or executor) has to include the value of the deceased person’s share in the joint assets in their calculation of the total estate value. The asset will pass to the survivor unless it can be shown that he or she made a disproportionate or no contribution to the account and there was no intention to gift the contents to the other named person on the account. In such a situation the part belonging to the person who has died will pass according to the will/intestacy.

Often these bank accounts may have been opened by the person with a partner or child to provide ease of access to funds after a death to pay for immediate expenses such as funeral costs, and there has been no contribution towards this by the other person named on the account. If this is the case the whole value of the account will need to be reported for IHT calculations.

If the surviving joint owner can prove that the person who died made no or a minimal contribution to the account, then this needs to be explained and its value can be excluded from any inheritance tax calculation.

What if inheritance is left to a charity?

Any part or all of an estate can be left to a charity or certain other organisations and that portion will not incur liability to IHT. Further, even if only a small amount of the estate is left to charity this might reduce the overall rate of IHT payable on the rest of the estate by between 10% to 36%.

Why does HMRC want to know about the 7 years before someone died?

IHT is not simply a tax on death but also a tax on certain gifts made during the life of a person, such as gifts into a trust (which are taxed at half the death rate) and lifetime gifts made within 7 years of death. If large gifts are made within 7 years of death, they cease to be free of IHT although they have the first bite of the NRB. If they are worth more than the nil-rate band (NRB) after applying for any exemptions, there will be a charge to IHT at the death rate of 40%. However, the IHT is chargeable on those gifts at a tapered rate if made more than 3 years before death i.e. the more years have passed since the gift was made, the less taxation will be payable by the beneficiary or beneficiaries.

Other Taxes on the Estate

Unpaid tax at death

If the person who has died owed tax of any kind during their lifetime, this must be paid. However, like other debts on the estate, this amount can be deducted from the total value of the estate to determine the amount of inheritance tax to be paid. This includes Income tax and Capital Gains tax outstanding at death.

Income Tax

Income for the tax year of death can use as the whole of the annual exempt amount for that year to calculate the income tax due to the date of death, irrespective of whether the person died on 6th April one year or 5th April the following year.

An estate may also earn income during the period it is being administered e.g., from investments or rent from the property. Income tax from these must be paid from the estate before beneficiaries can receive what has been left to them. There are rules relating to the exempt amount of income receivable depending on how long the estate administration continues.

Capital Gains Tax (CGT)

There is no CGT payable on death and all assets are given a value at the date of death from which any future gains are calculated. Any assets which have been owned by the person died which have increased in value since they were acquired, see any gain wiped out on death and a new date of death value is given to calculate future gains and losses.

This means that assets sold when the estate is being administered might give rise to CGT which must be paid before distributing the proceeds to any beneficiary. If the asset itself is transferred to a beneficiary, then he or she is said to get it at the date of death value.

There may be good reasons to do this if there are substantial gains or losses which the beneficiaries themselves wish to use, especially as the exemptions (and rates) may be different for individuals than for PRs depending on the timings of any sales. Also, the PRs might be personally liable if they don’t consider the wisdom of doing this and simply sell assets in their own name rather than offering them to the beneficiaries to use their allowances and personal rates.

PRs must take care not to pay out money or assets to beneficiaries without fully considering the duty to account for all taxes due whilst in their control during the estate administration. Failure to keep back sufficient reserves can land the PRs in a very difficult situation and lead to them to be personally liable.

Use a professional to administer the estate

It really is advisable to get the help of a qualified professional to administer an estate if IHT or any other form of tax may be payable. We suggest using a solicitor who specialises in probate rather than a generalist. STEP-qualified solicitors have done additional specialist training in estate administration which gives you the reassurance that this is their area of expertise and specialism. They will carry TEP after their name.

Worrying about getting the tax payments right when you will have other practical issues to attend to during the estate administration as well as grieving for the person who has died and dealing with all your normal day-to-day responsibilities can be a heavy burden to carry.

Reducing Inheritance Tax

If you have read through this article wondering if you can reduce the amount of tax that may have to be paid on your estate after your death, the answer is that there are ethical and legal ways to do this.

For personal, confidential, and practical help following a bereavement, call the National Bereavement Service helpline on 0800 024 6121 or visit the contact page.

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