More people are turning to Google for information on ‘inheritance tax,’ with searches in the UK up 18% year-on-year. A lot of the 70,000 monthly searches for info on this topic are questions, with many confused about how this tax works, if it would apply to them, how much they might have to pay, when they may have to pay it and much more.
To help, Tom Bates, Head of Underwriting and probate expert at Level, has provided some clear answers to the most searched for questions.
How much is inheritance tax?
Around 10,000 UK monthly searches / 120,000 per year
How much inheritance tax (also known as IHT) is paid depends on the total value of the deceased person’s Estate, and if it is over the threshold. The standard inheritance tax rate is 40%. It is only charged on the part of the estate that is over the threshold.
What are the inheritance tax thresholds? What is the inheritance tax allowance?
Around 9,000 UK monthly searches for both / 108,000 per year
The standard inheritance tax threshold is £325,000 per person, and the tax rate is 40% for anything over this. In other words, everyone has an allowance of £325,000 before paying tax on an inheritance. This drops to 36% if a tenth of an Estate is left to charity. There are also several exemptions and reliefs that may further reduce this number depending on the assets within the estate and whether any gifts were left prior to death
When do you pay inheritance tax?
Around 3,600 UK monthly searches / 43,000 per year
Inheritance tax is due to HMRC by end of the sixth month after the individual’s death. If it is not paid, then interest is likely to be charged.
The Personal Representative of an estate can choose to pay the tax on certain assets (such as property) by instalments with one due every year up to a total of 10 years.
Does inheritance tax apply to Spouses / Children?
Around 3,500 UK monthly searches / 42,000 per year
When it comes to inheritance tax for married couples and civil partners, there is usually no need to pay inheritance tax – if one partner leaves their Estate entirely to the other when they pass away. Everyone has a £325,000 allowance before IHT is payable too, and married couples and civil partners automatically get their spouse’s allowance added to theirs, making their new threshold £650,000 upon their death.
The situation is different for children though. Unless certain items such as properties are left in trust, or cash is gifted seven years before the parent passes away, then IHT is payable (if the Estate is over the threshold).
Do you have to pay inheritance tax before you inherit?
Around 2,700 UK monthly searches / 32,400 per year
Yes, IHT must be paid before Probate (the legal process of collecting and distributing assets from an Estate) can be done. This may be the full amount or the first instalment, providing the assets are eligible for this
Who pays inheritance tax?
Around 1,300 UK monthly searches / 16,000 per year
If a Will has been left, then the IHT bill is handled by the person nominated to deal with the Estate – known as the Executor. They are personally liable for this.
If possible, the tax should be paid for from the Estate before other items are distributed.
Executors and Beneficiaries may use services such as bridging loans or probate loans to cover the cost of IHT bills, potentially to avoid selling assets like properties.
Do you have to pay inheritance tax?
Around 2,000 UK monthly searches / 24,000 per year
Only around one in 20 Estates in the UK are liable for IHT at this time – although with rising house prices, this figure is expected to increase.
If the Estate is over the threshold, then this tax must be paid on the excess. Failure to do so could lead to financial penalties.
Not being honest about a deceased person’s assets, gifts given etc., to reduce the Estate value and pay a smaller IHT bill is not recommended. If investigations later reveal that IHT has been underpaid, then the consequences can be severe – for example, a penalty fee of as much as 100% of the tax due on the Estate.
Who pays inheritance tax on gifts?
Around 1,000 UK monthly searches / 12,000 per year
You can gift up to £3,000 per year tax-free (known as an annual exemption), and parents can gift their children up to £5,000 tax-free for their wedding.
If you give away other assets or money over these limits, and survive for at least seven years after this, then no IHT is paid on these – these are known as potentially exempt transfers or PETs. If you pass away within seven years though, then IHT is payable on a reducing scale. The tax is usually paid out from your Estate, rather than directly paid for by Beneficiaries.
Do you pay inheritance tax on a pension?
Around 700 UK monthly searches / 8,400 per year
Inheritance tax does not usually apply when you pass on your pension pot to your partner or children. This is because it is not usually counted as being part of your taxable Estate, providing you have nominated a beneficiary for your pension proceeds and made your provider aware. There are other tax considerations though, so it’s worth speaking to your pension provider about this.
Do you pay inheritance tax on a trust?
Around 500 UK monthly searches / 6,000 per year
When assets have been successfully transferred into a trust, they are no longer subject to IHT. However, recipients may need to pay higher income or capital gains tax on these assets so it’s important to use the right type of trust and make sure the recipients are aware.
Most people use trusts to leave property to their Beneficiaries to avoid a bigger IHT bill. When a property is in trust, the ‘owner’ often continues to live in it but may pay the trustees a small rent.
Around 900 UK monthly searches / 11,000 per year
The first step is to work out the total value of the deceased’s Estate. An estate agent can usually help to value a property, and a probate solicitor or professional estate valuer can be called upon to help with the rest. Once this is known, then the amount of IHT that needs to be paid can be calculated.
Why is there inheritance tax?
Around 100 UK monthly searches / 1,200 per year
Most modern taxes date back to around 1894, when the government introduced ‘estate tax’ to help pay off a big government deficit. It replaced several other taxes including the 1796 tax that was brought in to help pay for the war against Napoleon.
These receipts from IHT are now an income for the Treasury and help finance the expenses that the government incurs.
HMRC raised £6bn in 2021/22 from IHT compared with total tax receipts of £716bn so it is not huge in the scheme of things (less than 1%) but £6bn is still a lot of money.
Which other countries pay inheritance tax?
Around 100 UK monthly searches / 1,200 per year
Most countries have a tax relating to inheritance. That said, Australia hasn’t had IHT since 1979.
Where this does apply, rates vary by country – the highest is in Japan at 55%, while it’s a lower 4-8% in Italy and 10% in Iceland. In some places like Belgium or Switzerland, rates vary by region.
As well as the tax percentage varying by location, so do the thresholds.
Conclusion
At Level, we understand the complexities of inheritance tax. Our suite of probate funding products can be used to help with paying for IHT, estate administration costs, or to accelerate receipt of your inheritance.
So, whether you're managing an estate or a beneficiary waiting for distribution of an estate, we're here to provide the support you need. Look at our Estate Expense & IHT, Probate Disputes & Inheritance Release products, contact us on our web form or call us 020 7205 2870.
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