When someone dies, the assets, money, property and investments that make up their estate will pass to their beneficiaries. This process is overseen by the Executor – the person identified in the Will as responsible for carrying out the deceased’s wishes. The Executor also has responsibility for paying off any debts and taxes due.
Here, our Wills and Probate Solicitors provide guidance on how Inheritance Tax works and what other taxes may be payable on an estate.
Inheritance Tax (IHT) is payable on a person’s estate when they die. In practical terms, it is a tax on the net value of assets that are transferred from one person (the deceased) to another (the beneficiaries). HM Revenue & Customs (HMRC) collects IHT and will apply penalties if you fail to pay.
IHT must be paid on estates over the £325,000 threshold. If the total value of the estate is below this, you will not need to pay but you will have to complete the IHT forms to show the estate has been appropriately valued.
There is an exception for married couples and civil partners when the whole estate passes from one partner to the other. In this case, no IHT will be payable unless the estate is valued at over £650,000 when the second spouse or partner dies.
If you give your home to your children, the threshold rises to £475,000 and is set to increase in the 2020/21 tax year to £500,000.
The current rate of IHT is 40% and is only charged on the part of the estate above the threshold.
The Executor is responsible for calculating how much IHT is payable. They will have to value all the assets making up the estate and identify any deductions that apply. This process can be complicated and time-consuming, and penalties apply if mistakes are made. For this reason, many Executors choose to instruct a Wills and Probate Solicitor to support them during this process.
HMRC must confirm that all IHT has been paid before a Grant of Probate will be given by a court. As a Grant of Probate is often needed before gathering in the assets, IHT will have to be paid early in the process of administering the estate. HMRC requires IHT to be paid within six months of the death, after which interest will be charged on outstanding sums.
This will depend on the deceased’s circumstances. Income Tax may be payable on earnings made while the estate is being administered, including income from investments or properties held by the deceased when they died. A tax return must be completed for this income.
Capital Gains Tax (CGT) also applies to gains on any assets disposed of by the estate (except those transferred to beneficiaries). For example, if an asset is sold to pay off a debt, CGT will need to be paid on any increase in value of that asset if it is above the estates annual CGT exemption.