For those dealing with someone’s estate after their death, the Inheritance Tax bill can come as a nasty shock. Some Inheritance Tax may need to be paid before a Grant of Probate or Letters of Administration will be issued, which can sometimes create difficulties.
The current Inheritance Tax (IHT) threshold (as at August 2023) is £325,000, meaning that where more than this sum is left in an estate, IHT may need to be paid. The IHT threshold of £325,000 is known as the nil rate band, or NRB. The current standard rate of IHT is 40% and tax will usually be charged at this rate on any amount in the estate which is not covered by the NRB, or other exemptions, allowances or reliefs from IHT. If someone leaves a certain amount of their estate to charity, the rate of IHT can fall to 36%.
How to calculate Inheritance Tax
Inheritance Tax calculations can be complex. The estate’s Personal Representative (ie the Executor or Administrator) will need to value the deceased’s estate and also identify any gifts that the deceased made in the seven years before their death. Where the estate is liable for IHT, tax might be payable on some lifetime gifts.
All items of value will need to be included in the estate valuation, such as property, cars, jewellery, art, shares, Premium Bonds and investments etc. Their values as at the date of death should be reported to HM Revenue & Customs (HMRC). You can obtain professional valuations for some personal possessions, such as art or jewellery and HMRC provides guidance as to how assets should be valued on someone’s death.
In addition to the NRB, there is also an allowance in respect of the deceased’s residence, if this is left to ‘direct descendants’ such as children or grandchildren. This is known as the Residence NRB (RNRB). For deaths after April 2021, the RNRB is £175,000. The rules around the application of this allowance are quite complicated, and in some situations, the allowance might be claimable even if the person who has passed away no longer owned a property at their death. Unlike the NRB, the RNRB has to be claimed, and so will not automatically apply. This claim has to be made within 2 years of the date of death, and so it is important to ensure that if someone passes away, the Personal Representative is taking action suitably quickly to obtain all available IHT allowances.
When is Inheritance Tax payable?
IHT becomes due for payment on the last day of the month, six months after the date of death. For example, if someone dies on 16th January, any IHT on their estate will be due for payment on 31st July of that year. Any IHT which is not paid by that date, will start accruing interest from the following day. This interest will continue to build until all the IHT is paid. The rate of interest charged by HMRC is subject to change, and has increased 6 times already this year (up to 31st August 2023).
How to fund an Inheritance Tax payment
Many people do not have enough available cash to cover an IHT bill, which can potentially cause difficulties, as certain asset holders (such as banks, or investment companies) will not release funds until they have been given a Grant of Probate or Letters of Administration. In turn, the Grant will not be issued until the appropriate amount of IHT has been paid.
There are a number of ways around this. Firstly, if the deceased held money in a bank or building society account, it may be possible to ask the bank to release funds to HMRC to pay the IHT directly. Each bank has different requirements that may need to be met, in order for them to pay the IHT to HMRC.
In some cases, it is possible to pay IHT in equal annual instalments over a period of ten years. This is only an option where the estate includes something that would take some time to sell, such as a property or certain types of shares. Interest will continue to be charged on the outstanding amount for the whole ten-year period (or until the IHT is fully paid). In addition, HMRC require all tax due on the property or shares to be paid in full, once those assets have been sold. This option can also be useful if the beneficiaries are intending not to sell a house because they wish to keep it or for someone to continue living there.
Dealing with IHT is often complex and it is generally a good idea to seek legal advice from a qualified lawyer to ensure that your calculations are correct, that the correct forms have been completed and submitted to HMRC and to ensure you apply for all available allowances, exemptions and reliefs to avoid paying more IHT than you need to.
At BakerLaw, all our Private Client lawyers are experienced in dealing with the estates of people who have passed away, and the requirements of obtaining Probate or Letters of Administration, including the calculation and payment of Inheritance Tax. To make an appointment to meet with one of our experts in Estate Administration, please contact us on 01252 733 770 or by email at firstname.lastname@example.org so that we may take the required details, provide you with a quote for our fees and arrange a meeting to see you at our Farnham office.