This blog post explores how Inheritance Tax works and which other taxes HMRC applies to a deceased person’s estate.
When someone dies, their estate – their cumulative assets, money, investments, and possessions – will be passed on to their beneficiaries. These are usually family members but may also include friends and charities. If the deceased has left a Will, the beneficiaries will be named. The Will should also name an Executor – a person who the deceased has entrusted to ensure that their wishes are carried out. In the case of intestacy, where there is no Will, the entitled beneficiaries must be established in accordance with the rules of intestacy. This will be the role of the Administrator, who has exactly the same duties as the Executor when there is a Will. This role is collectively known as a Personal Representative.
Whether you are the Executor or the Administrator, you will have responsibility for ensuring that all debts and taxes due are paid before any money and assets are distributed from the estate. This is a legal requirement and failure to carry out these duties can have serious consequences, which is why many people choose to appoint a professional adviser to handle these matters.
What is Inheritance Tax and who pays it?
Inheritance Tax is a tax on the deceased’s estate after they die. You may sometimes also hear the phrase ‘death duties’, though this term is now redundant, as Inheritance Tax consolidated these multiple duties into a single tax in 1986. Technically, Inheritance Tax is a transfer tax on the net collective value of an estate as it passes from one person – the deceased – to another person(s). Like any other tax, it is collected by HMRC and there are requirements governing its payment and penalties for failure to comply.
How much Inheritance Tax do I have to pay?
Every estate benefits from a threshold of value below which no Inheritance Tax is payable. This is currently £325k, so if the deceased’s estate is valued at less than this, you will not need to pay any Inheritance Tax – though you may still have to complete the Inheritance Tax forms and show that the estate has been accurately valued. The exception to this rule is the estate of a married couple or civil partners (a couple joined by a civil partnership) where the first to pass away has left their entire estate to the surviving spouse or partner. In this case, you will not need to pay any Inheritance Tax unless the value of the estate exceeds £650k when the second person dies. Additionally, if the estate meets the excepted estate requirements, Inheritance Tax reporting is not necessary.
Inheritance Tax is levied at a rate of 40% on the net value of the estate beyond the nil-rate threshold. The net value of the estate is calculated by working out the gross value – the total worth of all assets – and then deducting any debts, such as mortgages, loans and credit card bills, and bequests to charities. You also need to look at whether they made gifts of more than £3k to anyone in the seven years prior to their death – these would exceed the tax-free gift allowance and would therefore be considered as part of the taxable estate. There are also some exclusions that apply to certain types of landholding and to overseas property bequeathed to an overseas citizen. In these cases, you will almost certainly need the support of a professional adviser to accurately calculate a value for Inheritance Tax.
Who calculates Inheritance Tax?
It will be up to the Executor or Administrator to calculate the value of the estate and to identify any and all applicable deductions. In very small or simple estates this can be fairly straightforward, but it’s surprising how quickly things can become complicated. Valuing property, art, antiques, jewellery, and investments can often take time and require expert advice. A professional Administrator will take care of all of this for you.
When does Inheritance Tax have to be paid?
A Grant of Probate will not be given until confirmation is received from HMRC that all due Inheritance Tax has been paid. Since the Grant of Probate is the key to unlocking the estate for distribution to any beneficiaries, this means in practical terms that HMRC expects you to pay Inheritance Tax before you do anything else. Inheritance Tax should be paid within six months of death. If you do not pay it within this time, HMRC will start to charge interest on the overdue sum.
This may be another reason for seeking professional advice and support in calculating the value of the estate and completing HMRC’s Inheritance Tax forms. Also, any delay in paying Inheritance Tax will delay the distribution of the estate to other beneficiaries, which can lead to friction and conflict.
Which other HMRC taxes apply?
This will depend on the deceased person’s circumstances but there may be Income Tax due on earnings during the year until their death. This may include any rent collected on property and earnings from investments in the UK and overseas. You will need to complete a tax return for the estate on this income.
In some cases, Capital Gains Tax may also be payable if the value of the deceased’s property and any other sold assets has risen since they were valued for probate purposes. Beneficiaries inherit assets at their probate value, so if this rises they are liable to pay Capital Gains Tax on the increase.
What happens if I don’t pay or don’t pay the right amount?
As the Executor or Administrator, you are responsible for accurately calculating and declaring any taxes payable from the estate. This is a legal responsibility and not to be taken lightly. Failure to discharge these duties accurately may leave you personally liable for any fines and interest due, particularly if you have subsequently distributed the value of the estate to other beneficiaries; they are under no obligation to provide funds to pay towards any miscalculations.
When instructing a professional to administer the full estate of a loved one, they can take on all financial and legal responsibility, meaning that the Personal Representative will not be liable.