What is a Taxable Estate?
27 December 2017
An Estate is the collective term for everything that someone owned when they died, including property, money, and possessions. Sometimes Inheritance Tax needs to be paid on a deceased person’s Estate. This is known as a Taxable Estate.
Every individual has an allowance on their Estate that is not subject to Inheritance Tax. This means that if the value of the Estate is below the limit of the allowance then it may not be liable to pay Inheritance Tax. If the value of the Estate is above the limit, then anything over that limit will be liable for Inheritance Tax. The current Inheritance Tax threshold/limit in England and Wales is £325,000. This allowance is referred to as a Nil Rate Band.
When is an Estate Not Liable for Inheritance Tax?
There is normally no Inheritance Tax to pay if your Estate is either below the £325,000 threshold or you leave your entire Estate to your spouse or to charity.
If you are married and have left your entire Estate to your spouse, then on their death they can use your unused tax-free threshold. This can increase the nil rate band to up to £650,000 (at today’s rates). This is known as a Transferable Nil Rate Band.
In addition to the transferable nil rate band, if the deceased person owned property (or has shared ownership in a property) which they are leaving to a direct descendant, then their Estate may also be entitled to a Residence Nil Rate Band, before any Inheritance Tax becomes payable. For more information on the residence nil rate band and when this might apply, see Residence Nil Rate Band Explained. This could result in up to a further £100,000 tax free threshold or £200,000 for a married couple.
Therefore, for a married couple the total tax free threshold could be up to £850,000. It may also be possible to deduct tax reliefs if there are agricultural or business assets within the Estate.
How to Calculate if My Estate is Taxable?
In order to calculate if your Estate is liable for Inheritance Tax you will need to find out the total value of your Estate. To do this, you’ll need to know the total value of any assets that you have as well as any debts (such as a mortgage, loan or credit cards). These are known as ‘liabilities’ of the Estate. You will also need to consider any substantial gifts that you have made during your lifetime, as these could be liable for Inheritance Tax after you die. More information on when gifts might be taxable can be found on the gov.uk website.
Inheritance Tax Example
If your Estate is worth more than your tax free threshold then Inheritance Tax will be charged at 40% for the value over that threshold. For example, if your Estate is worth £600,000 and your tax free allowance is £325,000 then you take away £325,000 from £600,000 which is £275,000 - so Inheritance Tax will be payable on the £275,000 at the rate of 40% - so £110,000 would be payable in Inheritance Tax.
How to Reduce Your Inheritance Tax Rate
The rate of Inheritance Tax you pay can be reduced to a rate of 36% on some assets, if you leave more than 10% of the net value to charity in your Will. The net Estate is what’s left after your liabilities are deducted from your assets.
Who Pays the Inheritance Tax?
Funds within the Estate (money or assets which are sold) can be used to for pay any Inheritance Tax due to HM Revenue and Customs (HMRC). It is the responsibility of your Executor to arrange payment within the timescales set out by HMRC. Failure to do so may result in HMRC issuing penalties.
Is Probate Required on Your Estate?
If your Estate includes property within England or Wales then it is likely that Probate will be needed. In this case, the Inheritance Tax will need to be paid to HMRC before a Grant of Probate can be issued; and a Grant of Probate is needed before the Estate assets can be distributed to the Beneficiaries.
With our Probate Complete Service we take full responsibility for obtaining Grant of Probate and dealing with the Legal, Tax (not VAT), Property and Estate Administration affairs*.
Do Beneficiaries Pay Inheritance Tax?
No, the Beneficiaries of your Estate don’t pay Inheritance Tax on what they inherit. The Inheritance Tax is a liability of the Estate, not the Beneficiaries.
If you are likely to have a taxable Estate you may wish to take this into consideration when making a Will.
*We can pay all the costs of a Co-op Funeralcare funeral when you use our Probate Complete Service, and the Estate has sufficient financial assets which can be sold in due course to repay our costs.