The entire probate process, including Inheritance tax (IHT), can be quite complex. Making sure you fully understand how IHT works and what you, or your family, may be liable for is important. In this guide we will give you a brief but effective rundown of how IHT works, and how to calculate inheritance tax.
What Is Inheritance Tax?
Simply put, Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who's died. In the UK, this tax applies if the estate's value exceeds a certain point, known as the inheritance tax threshold or the nil-rate band.
Who Needs to Pay Inheritance Tax?
Inheritance tax is paid by the executor of the will and is treated as a personal liability of the executor. Typically IHT will need to be paid prior to a Grant of Probate being issued.
If there is no will, the responsibility will then fall to an administrator. This is typically a professional person or organisation responsible for managing and distributing the assets of the deceased.
Current Inheritance Tax Thresholds
As of the latest tax regulations:
The standard inheritance tax threshold is £325,000.
Anything above this amount is taxed at 40%.
However, if you leave your home to your children or grandchildren, your threshold can increase by £175,000 (Residence Nil-Rate Band).
This means you could potentially pass on up to £500,000 without paying inheritance tax. For married couples or civil partners, unused thresholds can be transferred, allowing for a combined threshold of up to £1 million.
It should be noted that there are suggestions that the October Budget may contain some changes to the inheritance tax thresholds.
How to Calculate Inheritance Tax
To calculate inheritance tax, follow these steps:
Calculate the Total Value of the Estate:
Add up all assets, including property, cash, investments, and possessions
Subtract any debts and liabilities (mortgages, loans, and outstanding bills)
The resulting figure is the net value of the estate
Determine the Taxable Amount:
Subtract the inheritance tax threshold (and any additional allowances, such as the Residence Nil-Rate Band) from the net value of the estate.
The remaining amount is the taxable estate.
Apply the Inheritance Tax Rate:
Multiply the taxable estate by the inheritance tax rate (usually 40%).
For example, if an estate is valued at £600,000 and qualifies for the full £500,000 threshold, only £100,000 is subject to inheritance tax. At 40%, the tax bill would be £40,000.
Reducing Inheritance Tax Liability
There are several ways to reduce your inheritance tax liability:
Gifting: You can give away assets during your lifetime. If you survive for seven years after making a gift, it is usually exempt from inheritance tax.
Charitable Donations: Gifts to charities are exempt from inheritance tax. Additionally, if you leave 10% or more of your net estate to charity, the inheritance tax rate on the remainder may reduce to 36%.
Trusts: Placing assets in a trust can help reduce inheritance tax liability, though this area can be complex and professional advice is recommended.
Paying Inheritance Tax
Inheritance tax must typically be paid within six months of the person’s death. If the tax is not paid on time, interest may be charged. However, if the estate includes property, the tax can sometimes be paid in instalments.
Seeking Professional Advice
Inheritance tax planning can be intricate, especially with changing laws and individual circumstances. It's advisable to seek professional advice to ensure you are making the most of the available reliefs and exemptions.
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. Take a look at our Estate Expense & IHT, Probate Disputes & Inheritance Release products or get in touch with the team on 020 7205 2870.
