Do I Have to Pay Inheritance Tax Myself?
02 February 2018
In Probate, the Estate is responsible for paying Inheritance Tax, not the Executor or Administrator. However, the Inheritance Tax payment will need to be arranged by the Executor or Administrator before the Probate process can begin, meaning this often needs to be paid before money in the Estate becomes available.
When Does Inheritance Tax Need to be Paid?
If Inheritance Tax is payable on a deceased person’s Estate, this will need to be paid in full before the Grant of Probate or Grant of Representation can be applied for. These are the documents that give legal authority to someone to deal with the deceased person’s assets, property and money, so are integral to the Probate process.
Inheritance Tax must also be paid on all “liquid assets” within 6 months of the date of death. Liquid assets include bank accounts, shares, investments and personal possessions. However, any Inheritance Tax due on property (including Freehold and Leasehold properties) can be paid in annual instalments for up to a maximum of 10 instalments or until the property is sold.
This means that some Inheritance Tax usually needs to be paid before the money in the Estate can be accessed to cover the cost.
So How Should the Inheritance Tax be Paid?
Inheritance Tax can sometimes be paid directly from the deceased person’s bank account, using an Inheritance Tax form (IHT 423) which authorises a direct payment to HMRC.
The Executor/Administrator should also look to see if the deceased took out a life insurance policy to settle the IHT. These are often payable at the Trustees’ discretion and therefore payable outside of the taxable Estate. This means that the Executor/Administrator can access funds to pay the Inheritance Tax before the Grant of Probate has been received.
Alternatively, the Executor or Administrator may need to make the payment personally and then claim this back from the Estate when the money becomes available.
It is important that if a person pays the Inheritance Tax from their own pocket, they obtain relevant receipts from HMRC in order to claim the money back from the Estate.
How do I Know if I’m the Person Responsible for Paying?
The person (or people) who are responsible for completing the Probate will also be responsible for seeing that the Inheritance Tax is paid.
In order to determine if you are responsible for paying the Inheritance Tax (IHT) you need to establish whether you are the Executor or Administrator of the Estate.
If there is a Will: The Executor is the person who has been appointed to deal with the Estate. This person is responsible for paying the IHT. However, Inheritance Tax is an administration expense, which will be covered by the Estate, so the Executor is entitled to be reimbursed when the money becomes available in the Estate.
If there is no Will: The next of Kin, following the Rules of Intestacy would be granted legal authority to wind up the deceased person’s affairs. This person is known as the “Administrator” and the role is similar to that of an Executor. When taking on this role, the Administrator accepts responsibility for paying the IHT.
Either the Executor (appointed in the Will) or the Administrator (appointed under the Rules of Intestacy) will need to know the basic facts around paying IHT. They will need to ensure that they pay the correct amount of Inheritance Tax due, within the timescales set out by HM Revenue & Customs.
Calculating Inheritance Tax
There are 3 rates of Inheritance Tax. These are as follows:
1. The Estate is Worth Less Than £325,000
If the Estate is worth less than £325,000 then no Inheritance Tax is due. This is known as the “Nil Rate Band” and everyone in England and Wales is entitled to this rate.
If the deceased person was married and their spouse died before them, it’s important to establish whether their spouse’s Nil Rate Band was used up at that time. If not all of their £325,000 allowance was used, then whatever’s left can be transferred to the spouse and added to their own allowance. This is called a “Transferable Nil Rate Band.” This means that the total tax-free allowance could potentially increase to £650,000.
2. The Estate is Worth £325,000 or Over
If the Estate is worth £325,000 or more, then Inheritance Tax will be charged at 40%.
There are some exceptions to this rule. For example, if 10% or more of the Estate is being given to charity, then the lower rate of IHT is payable at 36%.
3. Property is being left to Children
There is also the new Residential Nil Rate Band of £100,000, which is potentially available where property is passing to a direct descendant of the deceased. If applicable, the Residential Nil Rate Band will be added to any other Nil Rate Band that the Estate is already eligible for.
The Executor or Administrator needs to be sure that they claim all available allowances. This will ensure that they calculate the correct Inheritance Tax. The Inheritance Tax form (IHT 400) will provide guidance for this along with the IHT notes.
Completing the Inheritance Tax Form
The Executor/Administrator is required to complete the Inheritance Tax form IHT 400 with all supporting documentation. This form is very extensive and can be quite daunting. However, once completed, this will then automatically calculate the amount of IHT due which is payable when the application for the Grant of Probate is made, as well as the amount due that can be paid in annual instalments.
With our Probate Complete Service, we take care of calculating Inheritance Tax, completing all the IHT paperwork and making payment to HM Revenue & Customs on your behalf.