Paying Inheritance Tax (IHT)
24 May 2021
Who Pays Inheritance Tax?
The executor of the person’s estate, who will have been named in the deceased’s Will, or the administrator of the estate 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 met.
Inheritance Tax (IHT) must be paid not later than 6 months from the end of the month in which someone died to ensure that statutory interest does not add to the amount of IHT payable by the estate.
How is Inheritance Tax Calculated?
The amount of IHT payable is calculated by valuing all the assets within the estate at the date of the person’s death. Meaning how much their estate is worth. This considers the value of all bank accounts, cash, personal items, shares and property belonging to the deceased. Our specialist team of probate solicitors can advise you and be engaged to formally value assets if required.
How do Gifts Affect Inheritance Tax?
In addition to the assets included within the deceased’s estate at the time of their death, the value of any gifts they have made within the 7 years leading up to their death may also need to be included.
Individuals have an inheritance tax exemption of £3,000 per tax year to give away as they see fit. That means that a single person can give away up to £3,000 in any one tax year (running April to March) to whomever they wish, without this being considered for tax purposes.
This £3,000 limit can also be carried forward for one year, meaning that a person can give away up to £6,000 but that allowance would still cover two consecutive tax years overall (i.e. you could not give £6,000 away, tax free, in one year, and then give another £3,000 to someone the following year as you would have used your tax free allowance for that year). This can be quite a complex situation and we would always recommend seeking advice where you are not sure/clear on what you can and cannot do without incurring tax consequences.
If the deceased gave away more than the tax free allowance then the value of the gifts (less the annual exemption) will need to be accounted for in calculating the inheritance tax which is due.
Certain types of gift are exempt and these include gifts on occasions such as weddings or civil ceremonies, birthdays or Christmas gifts, payments to an elderly relative or child, and gifts to charities and political parties; however, it is important to note that these gifts must be made up of surplus ‘normal income’.
Normal income is monies a person has coming in each month (i.e. not savings) such as state pension, private pensions, wages, etc. Furthermore, the monies gifted under the rules of ‘normal income’ must be surplus monies coming in. An example of this would be if a person had a monthly income of £2,000 and spent a total of £1,000 on food, bills, routine expenses, then the remaining £1,000 would be considered ‘surplus normal income’. This can be quite a complex issue and advice should be sought if you are not clear on what would and would not fall into this category.
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 ago.
Taper relief is a sliding scale that 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. For example, a higher amount of IHT tax will be due on a gift made 3 years before a person dies, than it would be on a gift made 6 years before a person dies. Again, it is best to seek professional advice on this to ensure you are not only minimising the amount you’re paying inheritance tax but that you are also paying the correct amount taking everything into account.
Gifts made more than 7 years before someone dies will not form part of the deceased’s estate for the purposes of the inheritance tax calculation.
Gifts of assets in which the deceased retained a benefit; however, may not benefit from the reliefs mentioned above and may still form part of the deceased’s estate, in full, despite the passage of time. An example may be a person who gifted their home to someone else during their lifetime but continued to reside there without paying rent.
Which Thresholds and Allowances Apply?
Determining when inheritance tax is due, and in what amount, can be a complex task with various exemptions and reliefs available, depending upon the composition and circumstances of the deceased’s estate.
For a single person, the current threshold at which inheritance tax becomes payable is £325,000, with a threshold of £650,000 for a married couple. If the deceased’s estate includes a residential property, in which the deceased lived during their lifetime and which is inherited by their lineal descendants (children or grandchildren and so on) then a further 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 relief such as business property and agricultural property.
What is the Rate of Inheritance Tax?
Ultimately, paying inheritance tax at the rate of 40% on the overall value of an estate, which exceeds the applicable tax threshold. This percentage can be reduced to 36% if at least 10% of the estate is left to charity.
How is IHT Paid?
Paying inheritance tax must be done 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.
Upon receipt of the forms, HMRC will examine the circumstances of the case and liaise with the executors or administrators of the estate with any enquiries they may have, 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 that confirms that the IHT liability of the estate has been settled.
Our team at Redkite can guide you through the process and provide expert advice on the calculations of paying inheritance tax.
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.