Inheritance Tax – What You Need To Know

What is Inheritance Tax

An important piece of Tax advice Is understanding Inheritance tax. Inheritance by definition, is assets left behind by a deceased person. Inheritance Tax is the tax charged on property, possessions and money. Even if there’ is no Inheritance Tax to pay, you’ll still need to report it to HMRC.

  • The threshold for inheritance tax is £325,000. This means If the value of the estate (Property possessions and money) is greater than this amount, there will be some payment due.
  • if you give away your home to your children or grandchildren your threshold can increase to £500,000.
  • The rate of inheritance tax is 40% on the amounts above the £350,000 threshold

When do you NOT have to pay Inheritance Tax?

In most cases, you don’t need to pay any inheritance tax if:

  • The total value of the estate is below the threshold of £325,000. (Also know as a nil rate band)
  • The estate is left to what is known as an exempt beneficiary. Examples of an exempt beneficiary include charity or community sports clubs.
  • If the value of your estate exceeds the threshold of £325,000 but you leave the estate to your spouse or civil partner.

An example of inheritance Tax in practice:

An elderly family friend has passed away and left you an estate of £525,000 (Property, money and possessions).

  • The first £325,000 falls under the nil band rate (so no tax payment is required)
  • The remaining £200,000 is liable for inheritance tax at the rate of 40%
  • You would be required to pay £80,000 in inheritance tax

Who pays Inheritance Tax?

  • In most circumstances where there is a will, the executor of the will arranges for the payment of the inheritance tax. In the absence of a will, the administrator of the estate will deal with the payments.
  • Inheritance Tax can be paid from funds within the estate, or from money raised from the sale of any assets.
  • However, the most common practice is that it is paid through the Direct Payment Scheme (DPS). This means, if the person who died had money in a bank or building society account, the person in charge of dealing with this matter can request that the inheritance tax be paid in this manner.
  • In some scenarios where there are insurance policies in place, there can be arrangements made through this insurance

When do you have to pay Inheritance Tax?

  • If the inheritance tax is paid within the first 6 months than no interest will be charged
  • If partial payment is made in the first 6 months, any balance left on the account will still be charged interest.
  • HMRC note that a reference number takes 3 weeks to process and receive, so this should be factored in with in the 6-month period.

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