Inheritance Tax (IHT) is a tax payable on the estate of a deceased. While there are complex rules regarding IHT and when it’s payable, the tax is generally due when the estate is over £325,000 at a rate of 40%. Our expert team at Lewis Nedas Law can help guide you through any IHT issues, whether you’re planning for your estate or dealing with a loved one’s estate. Here, we look to answer some of the commonly asked questions regarding IHT during the probate process.
How does Inheritance Tax relate to probate?
IHT is inextricably linked to the probate process. Firstly, the Executor is responsible for paying any IHT due from the estate. Secondly, the Court will not grant probate without IHT being paid (if required).
An Executor must estimate the value of the deceased’s estate and determine whether or not tax is due to HMRC. If IHT is due, the Executor/s must send the relevant forms to HMRC within one year. The amount of information which must be sent to HMRC depends on whether or not IHT is due.
When is Inheritance Tax payable on an estate?
How much IHT is payable on an estate is not as straightforward as taking anything over the £325,000 threshold. There are a few exceptions and rule differences depending on how the estate is to be divided:
Everything left to a spouse/civil partner
Anything a deceased’s spouse or civil partner inherits is inherited tax-free. There is no limit on the amount, which can be left tax-free here.
Gifts left to charity
Anything left to charity in a Will is also given tax-free and does not count towards your £325,000 nil-rate band. If a deceased left 10% or more of their estate to charity, they could qualify for a discounted IHT rate of 36%.
Homes left to the deceased’s children
If a deceased left their home to their children, then their nil-rate band (i.e. the threshold below which no IHT is due) is increased by £175,000 to £500,000. This is called the ‘Residence Nil-Rate Band’. This can only be used on one home up to £175,000 (anything above this will be counted normally for IHT).
The ‘Transferable Nil-Rate’
There are certain rules which allow for an increased nil-rate band. These occur when a person dies and does not use all of their IHT tax-free allowance. A spouse or civil partner of the deceased can use whatever is leftover of their earlier deceased’s allowance and add it on to their own.
For example:
- If spouse A dies and leaves everything to spouse B (hence paying no IHT) and then spouse B dies, the threshold which spouse B’s estate must reach before being liable to pay IHT is £650,000 (£325,000 of their own allowance and £325,000 of their pre-deceased spouse’s). If spouse B leaves their home to their children, then they can also use spouse A’s residence nil-rate band to leave a home up to the value of £350,000 to their children tax-free.
- If civil partner A dies and uses all but £25,000 of their tax-free allowance, then civil partner B’s estate will not be liable to IHT up to the value of £350,000.
There are many other rules regarding gifts made by the deceased and tapered allowances for high-value estates. Our team at Lewis Nedas Law can guide you through these issues and advise you on the best course of action if they are present.
Is Inheritance Tax due straight away?
As mentioned, the court will not grant probate before IHT is paid. Therefore, it is one of the first things that an Executor/Administrator must consider when dealing with an estate. The quicker any IHT issues are dealt with, the sooner probate can be granted, and the estate can begin to be distributed.
As an Executor, am I personally liable for Inheritance Tax?
It is important to remember that, as an Executor or Administrator, you are personally liable for paying any IHT due on the estate. If you distribute an estate before receiving the go-ahead from HMRC, who informs them that IHT is due, the Executors could have to pay this out of their own pockets. This is why the correct amount of IHT must be paid in the first instance.
Contact our Probate Solicitors in Central London today
Valuing an estate properly and determining the right amount of IHT to pay is a complicated task, but our excellent team at Lewis Nedas Law can assist Executors/Administrators to help avoid unwanted bills and personal liability. Contact us on 020 7387 2032 or fill in our online enquiry form to get help from our team.
