Do Beneficiaries Have to Pay Inheritance Tax?
08 November 2018
Whether or not Inheritance Tax will need to be paid on an Estate will depend on a number of factors, including how much the Estate is worth and who the Beneficiaries are. If Inheritance Tax is payable then this will be paid directly from the Estate, not by the individual Beneficiaries. But it could reduce the amount of inheritance the Beneficiaries then receive.
How Does Inheritance Tax Work?
Inheritance Tax can be confusing and it's a complex subject to get your head around. For a more comprehensive guidance on how Inheritance Tax is calculated and what the process looks like for paying Inheritance Tax, see Probate and Inheritance Tax. Below, we provide a quick whistle-stop tour of how it all works.
In England and Wales, every person is entitled to pass on a certain amount of money or assets when they die without any Inheritance Tax needing to be paid. This threshold is called the nil rate band and this is currently set at £325,000. If the total value of the Estate falls below this figure (once all the debts and other liabilities have been deducted) then no Inheritance Tax will be payable.
As well as this tax free allowance, there are also other allowances which can be applied to some Estates. These include the transferable nil rate band (where the unused allowance of a pre-deceased spouse can be transferred over) and the residence nil rate band, which can be applied when a property is being left to direct descendants.
In addition, inheritance that is being passed to certain Beneficiaries is also exempt from Inheritance Tax – these are called exempt Beneficiaries. The deceased person's husband, wife or civil partner would qualify as an exempt Beneficiary, as would any registered charities that the deceased has left a gift to in their Will.
Anything that falls outside of the above allowances will have Inheritance Tax applied. This is charged at 40%. However, if more than 10% of the Estate is being left to charity, then any Inheritance Tax that is due on the remainder will be charged at a reduced rate of 36%.
It's also worth noting that if the deceased made any significant gifts to friends or family in the 7 years before their death, these may need to be included in the Estate value for Inheritance Tax purposes. For more information, see Lifetime Gifts in Probate & Inheritance Tax.
So How Will Inheritance Tax Impact Me as A Beneficiary?
Any Inheritance Tax that does need to be paid will need to be paid directly from the Estate, before any money is distributed to Beneficiaries. It is the responsibility of the person administering the Estate (known as the Executor or Administrator) to calculate and pay the Inheritance Tax, so as a Beneficiary you won't need to get involved in this process.
The Executor or Administrator is personally responsible for any mistakes they make when calculating or paying the Inheritance Tax. For this reason, you and any other Beneficiaries should only receive your inheritance once all Inheritance Tax, debts and other liabilities have been paid from the Estate.
So, the main way in which Inheritance Tax could affect you as a Beneficiary is by reducing the overall amount of money that's left in the Estate. This, in turn, could potentially reduce the amount of money that you inherit. For example, if you are a residuary Beneficiary, meaning that you're entitled to a percentage of what's left in the Estate after debts have been paid, then a large Inheritance Tax bill will reduce what's left and directly impact on the amount of inheritance that you will receive.
If the Executor or Administrator distributes the Estate and then finds out that there is Inheritance Tax to pay then they could be held personally liable to pay this. This is not the responsibility of the Beneficiaries. This happened to one individual who administered the £1.2m Estate of his late friend. He didn't fully understand his legal obligations and distributed the Estate to the main Beneficiary without settling the Inheritance Tax bill first. He is now being held personally responsible for paying the £340k Inheritance Tax bill that's outstanding.