When Do You Have to Pay Inheritance Tax?

20 July 2016

When a loved one dies, you always need to consider whether or not Inheritance Tax needs to be paid from their Estate. The good news is that Inheritance Tax is only payable on a very small number of Estates in England and Wales.

Approximately 97% of Estates have no Inheritance Tax to pay at all. But, even when there is no Inheritance Tax to pay, you’ll probably have to provide HM Revenue & Customs (HMRC) with some information about the Estate.

The value of the Estate is the main factor used to decide whether or not Inheritance Tax will have to be paid. Everyone has what is called a Nil Rate Band. This is essentially a tax free allowance. The Nil Rate Band does change, but the current Inheritance Tax threshold (July 2016)is £325,000 per person.

On an Estate valued under £325,000 there will be no Inheritance Tax to pay.

On an Estate valued over £325,000 Inheritance Tax may have to be paid. 

The Inheritance Tax rate is currently 40%, but this only applies to anything over the Nil Rate Band (currently £325,000).

To use a simple example, the Inheritance Tax bill on an Estate worth £500,000 would be £70,000. The calculations are below:

  • The Estate is valued at £500,000
  • Take away your Nil Rate Band of £325,000
  • That leaves £175,000. Inheritance tax will be paid on this amount and charged at 40%, totalling £70,000.

There is no Inheritance Tax to pay when you inherit an Estate from your husband, wife or civil partner. This is because there is a rule called, Spouse or Civil Partner Exemption.

When a couple make Wills leaving their Estates to each other, for example by making Mirror Wills from as little as £234 (including VAT), there is no Inheritance Tax to pay when the first person dies, even if his or her Estate is worth more than the Nil Rate Band. You’ll need to consider Inheritance Tax in detail when the other half of the partnership dies.

There is a similar exemption for charities. If you leave your entire Estate to charity, there will generally be no Inheritance Tax to pay.

If the Estate is exempt from paying Inheritance Tax that does not mean that the Nil Rate Band (£325,000) is wasted.

Where a married couple or civil partnership leave their Estates to each other, the Estate of the first to die is exempt from paying Inheritance Tax so the Nil Rate Band is not used. But when the second of the couple dies, the original Nil Rate Band of £325,000 is added to their Nil Rate Band. This means that surviving spouses or civil partners often have Nil Rate Bands of £650,000. They should not need to be worried about Inheritance Tax unless their Estate, which includes what they inherited when their partner died, is worth more than £650,000.

In 2017, there will be further changes to the Nil Rate Band. An extra £100,000 will be available when a family home is left to descendants such as children or grandchildren. This extra allowance is expected to rise to £175,000 by 2020. This means that by then, it will be possible to have a Nil Rate Band of £500,000 per person, or £1,000,000 for a married couple or civil partnership.

Even though Inheritance Tax can seem to be straightforward, it is always best to tread carefully. There are payment deadlines and harsh financial penalties for getting it wrong, even if it is a genuine mistake.

Inheritance Tax can become complicated very quickly, especially when there are factors such as lifetime gifts, businesses, farms, foreign assets or property overseas. Inheritance Tax is widely accepted as one of the more involved aspects of dealing with the death of a loved one, and many people find it overwhelming at such a stressful and emotional time.

At Co-op Legal Services our team of Probate Solicitors and specialists deal with every aspect of Inheritance Tax as part of our Probate Complete Service. That might mean simply confirming that Inheritance Tax is not payable or preparing the necessary forms for HM Revenue & Customs and completing all the necessary work to make sure that the correct amount is paid.

For more information see Probate and Inheritance Tax.

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