After Someone Dies

Chapter 15 — Inheritance Tax

Inheritance Tax is one of the parts of estate administration that causes the most anxiety. Families often hear a figure such as forty per cent and assume that everything left by the deceased will be taxed at that rate. That is not how the calculation works. Inheritance Tax is assessed on the estate as a whole, after the relevant assets, debts, exemptions, reliefs and available tax-free bands have been considered.

The personal representatives are responsible for finding out whether tax is due, reporting the estate when required, arranging payment and keeping evidence for the figures used. Beneficiaries do not normally pay tax simply because they inherit. They may have tax to deal with later if, for example, they receive rental income, sell an asset at a gain or operate a business they inherit.

The rules are detailed and change over time. The figures in this chapter are the standard figures shown in current GOV.UK guidance at the time of writing: a basic nil-rate band of £325,000 and a standard rate of 40 per cent on the taxable amount above the available threshold. Check the current HMRC guidance before making a return or relying on a threshold. The book explains the process; it is not a substitute for advice on a complex estate.

What is being taxed

Start with the gross estate at the date of death. This normally includes:

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The value is normally the open-market value at the date of death, not the amount the family hopes to obtain later. Chapter 14 explains property valuation and Chapter 13 explains personal possessions. Keep the gross values visible. Do not hide the value of an asset by recording only what will be left after a mortgage or loan.

Then identify allowable liabilities and administration costs. A secured loan, credit card balance, funeral expense and other genuine debt may be relevant, but the debt must be real, enforceable and supported by evidence. A debt that was never intended to be repaid, or a liability created after death, may not reduce the taxable estate in the way the family expects. Ask HMRC or a specialist adviser where the position is uncertain.

The basic nil-rate band

The basic nil-rate band is the amount of an estate that can normally pass before the standard Inheritance Tax charge begins. The current standard band is £325,000. If the net taxable estate is below the available band, there may be no tax to pay, although the estate may still need to be reported and probate may still require the relevant information.

The band is not a personal bank account and it is not paid to each beneficiary. It is applied to the estate calculation. If an estate is worth £500,000 and only a £325,000 band is available, the amount above that band is considered for tax after other exemptions and reliefs. A simple example is not a final calculation: deductions, gifts, spouse exemption, charity, reliefs and the residence band may change the result.

The residence nil-rate band

The residence nil-rate band can increase the tax-free amount when a qualifying home is closely inherited by direct descendants. The rules are particular. The home must meet the conditions, and “direct descendants” has a defined meaning. Children, including adopted, foster and stepchildren, and grandchildren may qualify in the circumstances described by HMRC. A property left to a sibling, friend, nephew or partner who is not a spouse or civil partner will not automatically qualify.

The residence band can be restricted or lost where the estate is above the relevant taper threshold. It can also be affected where the deceased downsized, sold or gave away a qualifying home. There are rules that may allow a replacement property or other assets to preserve some benefit. Do not assume that a family home automatically produces an extra allowance. Check the current guidance and retain evidence of ownership, occupation, the gift in the will and any earlier sale or move.

The government overview currently describes the possible combined threshold as up to £500,000 for a person who leaves a qualifying home to children or grandchildren. That is a ceiling, not a guaranteed allowance for every estate. The calculation may be lower, and the allowance cannot simply be added without checking the conditions.

Married couples and civil partners

Transfers between spouses and civil partners are normally exempt from Inheritance Tax, subject to the status of the relationship and the nature of the transfer. This often means that the first estate pays little or no tax when assets pass to the surviving spouse or civil partner. It does not mean that tax has disappeared. The survivor's estate may include what they received and may be able to use unused allowances from the first death.

Unused nil-rate bands and residence nil-rate bands may be transferable when the second spouse or civil partner dies. The personal representatives will need evidence of the first death, the first estate and what allowances were used. Do not assume that a later personal representative or solicitor will find everything automatically. Keep the first estate's grant, tax forms, calculations and correspondence.

There is no general spouse exemption for an unmarried partner. Cohabitation, a long relationship or shared ownership does not create the same tax treatment as marriage or civil partnership. A will can protect a partner in other ways, but the tax result must be considered separately.

Charity and the reduced rate

Gifts to qualifying charities are generally exempt from Inheritance Tax. A charitable gift can also reduce the rate on some of the taxable estate to 36 per cent where the statutory ten per cent condition is met. The calculation of “ten per cent of the net value” is not simply ten per cent of the gross estate. It can depend on the will, the assets, deductions and the part of the estate from which the gift is made.

If the will contains a charitable gift, preserve the exact wording and ask the charity or adviser to confirm the information HMRC needs. Do not increase or reduce a charitable payment informally because the family thinks it will produce a better tax result. Variation of a will after death can have tax consequences and requires proper advice.

Gifts made during the deceased's lifetime

The estate may include gifts made before death. The most familiar rule is the seven-year rule for potentially exempt transfers to individuals. If the donor survives seven years, the gift may fall outside the estate for Inheritance Tax. If the donor dies within seven years, the gift may be brought into account, subject to the rules and any available exemptions or reliefs.

Do not search only for large property gifts. Look for transfers of money, vehicles, investments, business interests, valuable possessions, payments made for another person and gifts placed into trust. The deceased's bank statements, tax papers, correspondence and conversations with family members may reveal transfers that need checking.

Common exemptions can include the annual exemption, the small-gift exemption, wedding or civil-partnership gifts and normal expenditure out of income. Each has conditions and limits. A regular payment is not automatically exempt because it was made every month. The family needs to show that it formed part of the deceased's normal expenditure, came from income and did not leave the deceased without enough money for their usual needs.

There can also be a gift with reservation of benefit. If someone gives away a house but continues to live there without paying a proper market rent, the gift may still be treated as part of their estate. Similar problems can arise where a valuable item is given away but the deceased continues to use it. Record the facts and obtain specialist advice rather than deciding that a signed gift letter settles the matter.

Trusts, companies and reliefs

Trust interests can be difficult to value and may have their own tax treatment. The deceased may have created a trust, been a beneficiary, acted as a trustee or transferred assets into a trust. Locate the trust deed, accounts, tax returns and correspondence. A trustee's records may be as important as the deceased's personal papers.

Business Relief and Agricultural Relief can reduce or remove Inheritance Tax on qualifying assets, but the conditions are technical and depend on the type of asset, ownership period, business activity and changes made before death. A farm, a company shareholding, woodland or a business vehicle is not automatically relieved. Obtain the accounts, ownership records and professional valuation. Never tell a family that an asset is “tax-free” without checking the statutory conditions.

Pension arrangements, life policies written in trust and other benefits may fall outside the estate for some purposes but still need to be disclosed or considered. The correct treatment depends on the scheme and the arrangements in place. Contact the provider and retain the scheme's statement, nomination information and any trust paperwork.

Joint assets and the family home

Joint bank accounts and jointly owned property need to be examined rather than divided by instinct. The legal ownership, beneficial ownership, contributions, survivorship and any declaration of trust may all matter. The deceased's share of a jointly owned asset may be included in the estate even if the asset passes automatically to the surviving owner.

For a jointly owned home, keep the title, trust documents, mortgage statement and valuation together. A surviving owner may receive the legal title but still need to account for the deceased's beneficial share. The tax position and the probate position are related but not identical. If the family has been using the property informally, do not turn that informal arrangement into a final calculation without advice.

Overseas assets and domicile

An estate can include assets outside England and Wales. Foreign property, overseas accounts, pensions and businesses need to be identified even when a local probate process is also required. The tax treatment can depend on the deceased's domicile or long-term residence, the location of the asset, treaties and the law of the country where it is held.

Obtain a local valuation and local legal advice where necessary. Translate important documents and record any foreign tax paid or payable. Do not assume that a foreign property is ignored because it cannot be transferred using an English grant. Equally, do not assume that the UK calculation will be identical to the foreign tax calculation.

Do we need to report the estate

Some estates are excepted from a full Inheritance Tax account, while others require a detailed return. The reporting route depends on the estate's value, gifts, reliefs, trust interests, foreign assets and other facts. A no-tax estate may still have to be reported to HMRC or the probate service before the grant can be issued.

The current forms and online process can change. Follow the GOV.UK guidance that applies at the date of death and the date of application. A simple estate may be dealt with through an online service or a shorter return. A more complicated estate may require form IHT400 and supporting schedules. Do not choose the shorter route merely because no tax appears to be due. If the estate has lifetime gifts, a trust, a business, agricultural property, a foreign asset or a disputed valuation, ask whether a full account is required.

The personal representatives are signing that the information is complete and accurate to the best of their knowledge. They should make reasonable enquiries and keep a note of the questions asked, the records checked and the assumptions made. If an asset cannot yet be valued, explain the position and obtain an estimate or specialist advice rather than leaving it out.

Paying Inheritance Tax

Inheritance Tax is normally due six months after the end of the month in which the person died. Interest can be charged after the due date. Check the current deadline because payment and reporting requirements can interact with the probate application.

The estate may have little cash available before the grant. The personal representatives can ask banks whether money can be released under the Direct Payment Scheme to pay HMRC, where the bank and circumstances allow. The scheme does not remove the need for a correct calculation or a proper application.

Tax on some assets, particularly land, property and certain shares, may be payable by instalments. Instalment treatment can help with cash flow, but interest may continue on the unpaid balance and the conditions must be followed. The personal representatives should not sell a property, borrow privately or distribute money to beneficiaries to solve the tax problem without first checking the consequences.

Keep the HMRC payment reference, bank confirmation, amount paid, date paid and any instalment agreement with the estate papers. If the bank, insurer or investment provider pays money directly to HMRC, retain the written confirmation.

What happens if the valuation changes

A property may sell for more or less than its date-of-death valuation. A collection may be valued again after an expert inspection. A shareholding may move sharply before it is transferred. Record the later event without altering the original estate valuation.

Where an asset is sold within the relevant period, HMRC may have rules that require a loss or gain to be considered. The personal representatives should ask whether a corrective account, loss claim or amendment is needed. Do not make a change simply because the sale price is different. A later price may reflect repairs, marketing, market movement, a forced sale or a different interest in the asset.

If an error is discovered, act promptly. Tell the adviser or HMRC what was wrong, how it affects the calculation and what evidence supports the correction. An honest correction is much safer than leaving a known mistake in the file.

When professional help is sensible

Professional advice is particularly sensible where there is a large estate, a family dispute, a property development opportunity, a business, agricultural land, a trust, lifetime gifts, overseas assets, a surviving unmarried partner, a missing valuation or a possible conflict between beneficiaries.

Ask the adviser to define the work. A tax adviser may prepare the Inheritance Tax account without handling the conveyancing or clearance. A solicitor may advise on the will and trust but instruct a separate valuer. A specialist valuer may provide the evidence without filing the return. Agree the fee, the information needed, the person responsible for signing and what happens if HMRC asks questions later.

Professional fees are an estate expense when reasonably incurred for administration, but they still reduce what is available to beneficiaries. Obtain authority before committing the estate to a large piece of work, particularly where beneficiaries disagree. Keep invoices and note which part of the work relates to tax, property, legal advice or sale.

Inheritance Tax checklist

1. Confirm the date of death and the current HMRC guidance.

2. List every asset at its date-of-death value before deducting debts.

3. Record jointly owned assets and investigate beneficial ownership.

4. Obtain the property and contents valuations described in Chapters 13 and 14.

5. Gather bank statements, investment statements, pension information and insurance details.

6. Search for lifetime gifts, transfers into trust and gifts with a reservation of benefit.

7. Check whether the residence nil-rate band may apply and who inherits the home.

8. Check whether unused allowances from a deceased spouse or civil partner can transfer.

9. Identify charitable gifts, Business Relief, Agricultural Relief and other possible exemptions.

10. Locate trust deeds, company accounts, farm records and foreign-asset documents.

11. Obtain evidence for debts, mortgages, funeral costs and reasonable administration expenses.

12. Decide whether the estate requires a full account or an excepted-estate process.

13. Complete the correct HMRC form and supporting schedules.

14. Arrange payment by the deadline or agree an instalment arrangement where available.

15. Keep payment references, calculations, reports, correspondence and signed declarations.

16. Record later sales or valuation changes separately and correct genuine errors promptly.

Inheritance Tax is best handled as a documented investigation rather than a single frightening percentage. The family should know what has been included, what has been excluded, why each allowance or relief is being claimed and how the tax is being funded. Once that work is complete, the personal representatives can move from tax planning to the formal probate application and the practical work of clearing and dealing with the property.

The next chapter explains how to apply for the grant of probate or letters of administration and what the grant allows the personal representatives to do.

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About Harry Georgiou

Harry Georgiou is the owner of Swifty Clearances, a waste clearance business. He writes about responsible waste disposal, fly-tipping prevention, and the practical steps households and businesses can take to avoid inadvertently funding illegal waste operations.

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Chapter 15 — Inheritance Tax

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