How do I pay Inheritance Tax and how much should I pay? This article explains how inheritance tax is calculated and how and when it should be paid.
When someone dies, their Personal Representatives need to deal with the administration of the deceased’s estate. During the administration it is crucial that the Personal Representatives deal with settling liabilities of the deceased (including Inheritance Tax) prior to dealing with the distribution of the estate to the beneficiaries. Inheritance tax is a tax on the estate of someone who has died. It will not be payable on every estate and will depend on the particular circumstances at hand. Someone’s estate may be formed of assets such as property, money and possessions, the value of which will be included within the calculation as to whether Inheritance Tax is payable or not.
What causes an Estate to be liable for Inheritance Tax?
There is not normally any Inheritance Tax to pay where the value of a deceased’s estate is established to be below £325,000 or where they leave everything above the £325,000 threshold to their spouse, civil partner, a charity or a community amateur sports club (although such an estate will still be required to be reported to HMRC)
If the person who has died leaves their home to their children (including adopted, foster or stepchildren) or grandchildren their threshold can be increased to £500,000.
At what rate is Inheritance Tax charged?
Where due, the standard rate at which Inheritance Tax is charged is 40% but the estate can pay Inheritance Tax at a reduced rate of 36% on some assets if the person who has died left 10% or more of the ‘net value’ of their estate to a charity in their will.
How do I know how much Inheritance Tax is due on an Estate?
The estate will need to be valued and the level of Inheritance Tax due ascertained based on the specific assets of the estate taking into account any exemptions or other relevant factors such as any gifts made shortly before death. This is often a complicated assessment and many people prefer to instruct solicitors to deal with this on their behalf owing to their up to date knowledge of the law and experience.
Who is liable to pay the amount due?
Funds from the deceased’s estate are used to pay Inheritance Tax to HM Revenue and Customs. This is settled by the Personal Representatives who are dealing with the Estate.
If the person who has died made gifts to people in their lifetime, those people might have to pay Inheritance Tax, but only if in certain circumstances. Everyone has an annual exemption which is an amount they are permitted to gift each year without that amount being added to their estate when they die.
When does the amount due need to be paid by?
Inheritance Tax must be paid no later than 6 months from the end of the month in which the deceased died.
How do I make payments?
There are two different ways of settling Inheritance Tax:
Firstly, it can be paid by instalments. This option may be available if the estate comprises property, listed shares or securities or certain unlisted shares or businesses. The instalment option is also available where a personal representative can show that paying in one lump sum would cause financial hardship.
If using this option, the Inheritance Tax must be paid in 10 annual instalments, with the first instalment due at the end of the sixth month after the deceased’s death. Interest is not charged on the first instalment but will be on later instalments.
Interest is charged on the total value of the outstanding tax as well as on any instalments that are not paid on time. Furthermore, if the asset which allows the Inheritance Tax to be paid in instalments is sold (for e.g. house or shares) then the full outstanding balance of the tax must be paid.
Alternatively, the balance may be paid in one payment which is appropriate where the deceased had sufficient funds in a bank account to settle the Inheritance Tax upfront.
What funds are used to pay Inheritance Tax?
It may be possible to settle Inheritance Tax directly from deceased’s bank account/s using the direct payment scheme if there are sufficient funds to do so.
Alternatively, the Personal Representatives may apply for a bank loan using assets in the estate as security.
What happens if Inheritance Tax payments are not made on time?
In the event that Inheritance Tax is due and is not settled within the prescribed timescales, interest will become due. Interest rates change from time to time with the current rates being 2.75% and 0.5% on repayments.
How do I get the Grant of Representation after paying Inheritance Tax?
You will need to settle the Inheritance Tax due (either by paying the balance or choosing the instalment option) before the Grant will be issued. Payment is made to HMRC who will notify the Probate Registry once this has been settled. Only after this time will the Grant of Representation be issued.
What happens if further assets are discovered after Inheritance Tax has been settled?
Occasionally, some assets do not come to light until after Inheritance Tax has been paid and the Grant of Representation obtained. In this event, the discovery of the additional assets may cause an additional amount of Inheritance Tax to be due or may cause Inheritance Tax to be due on an estate which was previously under the threshold. In either event, a corrective account with a recalculation of the Inheritance Tax due should be submitted to HMRC within 6 months of discovering the error.
Can I reduce the amount of Inheritance Tax due?
This should be something which is considered at the time of making your Will. If, however you are dealing with the estate of someone who has died, the benefits of instructing a solicitor with the requisite experience in administering estates are that they will have knowledge of the available exemptions and reliefs and will apply them in the calculation to ensure that the correct amount of Inheritance Tax is paid.
What if I need help with any of the above?
At Girlings, we specialise in dealing with all aspects of administering estates including the calculation and payment of Inheritance Tax.