British families paid a staggering £5.1bn to HM Revenue & Customs (HMRC) in Inheritance Tax in the tax year ending in April 2017.
If you decide to calculate Inheritance Tax yourself during Probate, you run the risk of the Estate paying far more to HMRC than is actually needed. Alternatively, if you under calculate how much Inheritance Tax needs to be paid, then you can be held personally financially liable for this.
Working out how much Inheritance Tax needs to be paid after someone dies is a complicated process. There are various tax allowances available, some of which are transferable between spouses, and the tax liability of the Estate can be reduced if certain people or organisations will be inheriting from it. You need to ensure that you make the most of these allowances, so that the Estate does not pay more Inheritance Tax than is necessary.
Make sure that you don't pay too much Inheritance Tax by instructing a Probate Solicitor to deal with the Estate on your behalf.
With our Probate Complete Service we take full responsibility for getting Grant of Probate and dealing with the Legal, Tax* (excluding VAT), Property and Estate Administration affairs.
*We deal with the Inheritance Tax, Income Tax and Capital Gains Tax matters of the deceased, and apply any tax exemptions or savings where appropriate. We also deal with HM Revenue & Customs (HMRC) on your behalf.
What Is Involved in Probate?
After someone dies, the legal process of winding up their affairs is called Probate. During this process, there is a significant amount of legal and administrative work that has to be carried out, including identifying and contacting Beneficiaries, obtaining a Grant of Probate, settling outstanding debts, collecting in all the assets, selling or transferring these and distributing the Estate.
There is also a significant amount of complex tax work to do, including calculating how much Inheritance Tax needs to be paid. In order to do this, you will need to calculate the total value of the Estate. This includes any property and its contents, stocks, shares, foreign assets, digital assets (such as crypto currencies), life insurance policies, pension plans, and any savings.
Calculating Inheritance Tax
Once you have calculated the total value of the Estate, you'll need to work out whether Inheritance Tax is payable and how much needs to be paid if so. In order to do this, you'll need to take into account any tax allowances that can be applied to the Estate.
There are a number of thresholds and allowances to take into consideration when working out what is owed to HM Revenue & Customs. You'll want to make sure that none of these are missed, otherwise there's a strong chance that the Estate could pay more Inheritance Tax than is needed.
Nil Rate Bands
Every individual has an Inheritance Tax allowance called a nil rate band, which can be applied to their Estate when they die. Currently this is £325,000, meaning that Inheritance Tax only needs to be paid on the value of the Estate that falls above this threshold. This portion of the Estate will be taxed at 40%. If the total value of the Estate falls below this threshold, then Inheritance Tax won't be payable.
Straight forward enough, right? Well this isn't necessarily the only allowance that can be applied to the Estate, and this is where it begins to get more complicated.
If the home of the person who died is being passed on to their direct descendants (their children or grandchildren) then there is another tax-free allowance that can be applied. This is called the residence nil rate band. This is a relatively new Inheritance Tax allowance which was introduced in April 2017.
Currently the residence nil rate band can increase the tax-free allowance on an Estate by £125,000, although this figure will increase by £25,000 each year until it reaches £175,000 in 2020.
To establish whether the residence nil rate band can be applied, you'll need to consider a number of factors, such as whether the property was the person's main residence. It may still be possible to apply this if the person had moved into a care home so was no longer residing in the home. For more information see Will My Estate Benefit from the Residence Nil Rate Band?
Both the nil rate band and the residence nil rate band can also be transferred between spouses. This means that if one spouse died and either of these nil rate bands were not used up, then they can be applied to the Estate of their spouse who died after them. This can essentially double the tax-free allowance available on an Estate if a predeceased spouse's allowances were unused.
Another point to consider is that certain Beneficiaries are exempt from Inheritance Tax. So, for example, if an entire Estate is being left to the deceased person's spouse, then no Inheritance Tax would be payable because the spouse is an exempt Beneficiary.
Similarly if the whole Estate was being left to registered charities, then these are also exempt Beneficiaries. Even if only part of the Estate is being left to charity, if this amounts to 10% or more of the total Estate value then this reduces the Inheritance Tax liability on the rest of the Estate (so this would be charged at 36% instead of 40%).
Getting It Right
We have not covered everything here, this is simply a look at some of the most common Inheritance Tax allowances that can be applied to an Estate. As you can see, just with these there is a lot to think about.
If you don't identify and apply all of the tax allowances that are available, then the Estate could end up paying considerably more in Inheritance Tax than it should. This, in turn, means that less will be passed on to the loved ones of the deceased.
While it may seem like a more economical option to save the money on a Probate Solicitor and do the work yourself, this may not always be the best approach. It's worth bearing in mind that if you don't calculate everything properly and apply all of the relevant tax allowances, what you save in Solicitors fees could end up being a fraction of what is overpaid in Inheritance Tax.
With our Probate Complete Service we take full responsibility for calculating the Inheritance Tax liability on the Estate and liaising with HM Revenue & Customs on your behalf. We can ensure that all relevant tax reliefs are utilised and that all tax exemptions are applied. We can also complete all of the necessary paperwork and ensure that any Inheritance Tax that is due is paid within the deadlines.
For free initial advice and guidance call our Probate Advisors on 03306069584 or contact us online and we will help you.