When I die will my Estate have to pay Inheritance Tax and if so how much?
07 January 2019
Not all Estates are liable for Inheritance Tax. The answer to this question will vary depending on how much you own on the day that you die, and who is entitled to inherit from you. We explain how it works.
What Will Happen to My Estate After I Die?
When you die, your affairs will need to be wound up, any outstanding debts paid off and your Estate distributed to those that are entitled to inherit it. This process is called Probate and this will fall to the person – or people – who have been named as Executors in your Will (if you have one). If you don't have a Will, then this person will be determined by inheritance laws instead. The term for this individual is 'Personal Representative.'
As part of the Probate process, your Personal Representative will need to calculate whether any Inheritance Tax is due and how much if so. They will then be responsible for reporting this to HM Revenue & Customs (HMRC) and settling the tax bill from the Estate.
One of the first things that your Personal Representative will need to do is to value everything in your Estate. This includes everything of value that you own when you die including your home, car, jewellery and other possessions, as well as any money in your bank or building society accounts and other investments they you held.
To calculate the overall value of the Estate, your Personal Representative will need to subtract any debts, bills and funeral expenses from the total value of your assets. Any Lifetime Gifts that you have made in the last 7 years will also need to be taken into account.
When Does Inheritance Tax Need to Be Paid?
There is a tax free allowance that will be applied to every person's Estate when they die - this is the amount that you are able to leave to your Beneficiaries without it being taxed. IHT is currently only payable if your Estate is worth more than your nil rate band, which is currently £325,000 per person.
There are other tax free allowances that may also be applicable, such as the transferable nil rate band (if you have a pre-deceased spouse) or the residential nil rate band (if you're leaving your home to direct descendants). Your Personal Representative will need to establish which tax exemptions can be applied to your Estate.
If your Estate is worth more than the nil rate band(s), then IHT will be charged at 40% on any value over that threshold. This is payable directly to HMRC and must be paid within six months of the end of the month in which you died.
If IHT is not paid before the deadline, your Estate could have to pay penalties to HM Revenues & Customs. These could initially take the form of interest charges on the amount owing and could then include significant additional penalty costs.
How to Pay Inheritance Tax
Before your Personal Representative can pay your IHT bill, they will need to get a reference number from HMRC. Once they have this, they can then pay HMRC either directly from your Estate or they can pay from their own funds, and then claim the money back from your Estate.
Raising the money to pay the Inheritance Tax bill may mean cashing in your savings accounts, and potentially also selling some of the assets in the Estate. If, however, there is no cash in your estate your Personal Representative can arrange to pay the tax in monthly instalments over 10 years. In this scenario, interest will be due on the outstanding tax.
If your executors don't know exactly how much IHT is owed by your Estate (if, for example, they are waiting on a property sale to determine the full Estate value) they can make payments before finding out the precise figure. These are known as "payments on account."
It is worth noting that HMRC will not send out individual receipts for each payment made; they will only send a "clearance letter" once the entire IHT bill has been paid (along with any interest). The best way for your Personal Representatives to keep track of payments is therefore by keeping a close eye on the bank statements.
Get Professional Probate Assistance
If you find that you are a responsible for administering an Estate, there is the option of instructing a professional to take care of the Probate work on your behalf. With Co-op Legal Services' Probate Complete Service, our Probate Solicitors and specialists can deal with your loved one's Estate and take care of the legal, tax and administrative work that Probate entails.
We take full responsibility for obtaining the Grant of Probate, completing all of the Inheritance Tax, Income Tax and Capital Gains Tax paperwork and dealing with HM Revenue & Customs. We will also arrange the sale or transfer of assets and contact all of the Beneficiaries on your behalf. Our fixed fee would be paid for with funds from the Estate, with nothing payable upfront from the Personal Representative.
Once we have provided you with a written quote for the agreed work to be done that price will not change, unless the original information we are given is shown to be incorrect or circumstances change.