Paying Inheritance Tax – Common Queries Answered!

8 December 2020

At Redkite we frequently receive enquiries relating to Inheritance Tax liability (‘IHT’). In this article we therefore offer guidance on some of the key issues.

Determining when inheritance tax is due, and in what amount, can be a complex task. There are various exemptions and reliefs available, depending upon the composition and circumstances of the deceased’s estate, so it is always better to speak to an expert to ensure that you pay the correct amount, taking into account all of the applicable allowances to reduce the overall liability.

What is the current Inheritance tax threshold?

For a single person the current threshold (the overall value of everything in the deceased’s estate), after which Inheritance Tax becomes payable is £325,000, with a threshold of £650,000 for a married couple.

How is this valued?

The amount of IHT payable is calculated by firstly valuing all of the assets within the estate at the date of the deceased’s death.  This means valuing all bank accounts, cash, personal items, shares and property belonging to the deceased.

What allowances apply?

Allowances are awarded against a variety of items in an estate and these vary depending on the individual circumstances of the estate and how it is comprised.

Allowances can include:-

If an estate includes a residential property which the deceased lived in during their lifetime, which is inherited by their lineal descendants (children or grandchildren and so on), then an additional allowance of up to £175,000 for individuals, and up to £350,000 for married couples can apply, provided that the overall estate value is below £2 million.

In addition, certain assets can attract specific tax relief, such as business property and agricultural property.

No IHT is payable on ‘gifts’ between husband and wife, or civil partners, but can apply where the gift is given to someone other than a spouse, see more on gifts below.

Rate at which IHT is paid

Ultimately, IHT is payable at the rate of 40% on the overall value of the part of the estate which exceeds the applicable tax threshold.  This can be reduced to 36% if at least 10% of the estate is left to charity.

Who is responsible for paying the IHT?

The executor of the estate named in the deceased’s Will, or the administrator if the person died without making a will, are responsible for administering the estate of the deceased and ensuring that all debts of the estate are paid. This includes calculating the appropriate Inheritance Tax liability and ensuring that it is paid.

Inheritance Tax (IHT) must be paid not later than 6 months from the end of the month in which the deceased died to ensure that statutory interest does not add to the amount of IHT payable by the estate.

Gifts

In addition to assets comprised within the deceased’s estate at the date of death, the value of gifts made within the 7 years prior to death may also need to be included in the estate value for IHT purposes.

Individuals have an IHT exemption of £3,000 per tax year to give away as they see fit. This amount can be carried over for one year making a £6,000 allowance overall in two consecutive tax years.

If the deceased gave away more than this during a set period of time then the value of the gifts (less the applicable annual exemption) will need to be accounted for in calculating IHT due.

Certain types of gift are exempt and these include gifts on occasions such as weddings or civil ceremonies, birthdays or Christmas gifts made up of normal income, payments to an elderly relative or child and gifts to charities and political parties.

If the deceased gave away more than the applicable nil rate band allowance, currently £325,000, then taper relief is available to reduce the rate of IHT payable on the gift, if it was made between 3 and 7 years prior to the death of the deceased. Taper relief will reduce the rate of IHT payable on the gift from 40% down to 0% during the period from 3 to 7 years after the gift was made.

Gifts of assets in which the deceased retained a benefit however may not benefit from the reliefs above and may still form part of the estate, in full, despite the passage of time.  An example may be a deceased who gifted their home during their lifetime but continued to reside there without payment of rent.

How is IHT paid?

If applicable, IHT must be paid prior to the Probate Registry issuing a Grant of Probate.  The Direct Payment Scheme allows for the use of funds from accounts held by the deceased in order to meet an IHT liability. Completion of the relevant forms and submission to the bank/building society will then allow for payment to be made directly to HMRC.

If the deadline for payment is approaching and it has not been possible to finalise the value of the estate, then a payment on account can be made to HMRC in order to reduce the overall liability of the estate to statutory interest.

HMRC

Upon receipt of the forms HMRC will examine the circumstances of the case and liaise with the executors or administrators with any enquiries or additional information that may be required.

When HMRC are content that the correct amount of tax has been paid the matter will be closed and a clearance certificate can be requested. This form confirms that the IHT liability of the estate has been settled.

Importance of properly paying IHT liability

It is of great importance that either the executor or administrator pays the appropriate IHT liability. Our team at Redkite can guide you through the process and provide expert advice and inheritance tax calculations.

This article was written by Rachel Broughton, Solicitor within the Wills, Probates & Estates Team of Redkite Solicitors. Rachael’s contact details can be found HERE.

To contact Mathew Bowen, Head of our Wills, Probate & Estates team, see HERE.

See all of our Tax planning & Trust Services HERE.

See all of our Wills, Probates & Estates Services HERE.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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