Probate case study
Probate and Inheritance Tax
In England and Wales, Inheritance Tax (IHT) typically has to be paid when an individual’s estate (their property, finances and belongings) is worth more than £325,000 when they die.
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Will Inheritance Tax need to be paid?
In England and Wales, Inheritance Tax typically has to be paid when an individual’s estate (their property, finances and belongings) is worth more than £325,000 at the time of their death.
The £325,000 figure is the current Inheritance Tax threshold, but it's subject to change each year in the budget.
The current Inheritance Tax rate in England and Wales is 40% on anything above the £325,000 threshold, although it can be reduced to 36% if 10% or more of the estate’s net value is left as a gift to charity.
A further £175,000 tax free allowance may be available with the residence nil rate band. This is a relatively new Inheritance Tax allowance which reduces Inheritance Tax liability on an estate when a home is being passed down to children or grandchildren.
If the person who died owned their home in their sole name, the whole of the home will be included in the estate value. If they owned their home with someone else and they owned an identifiable share, only the value of their share will be included in their estate.
The more valuable the home is, the more likely it is that there will be Inheritance Tax to pay.
What does probate have to do with Inheritance Tax?
Part of the probate process is to get the grant of representation, which confirms the legal authority to administer the estate. However, before this can be done, it is necessary to value the entire estate of the deceased, and to calculate any Inheritance Tax due.
If you overcalculate Inheritance Tax yourself during probate, you risk the estate paying more to HMRC than is needed. Alternatively, if you undercalculate how much Inheritance Tax needs to be paid, then you can be held personally financially liable for this.
The correct Inheritance Tax forms must be obtained, completed and submitted to HMRC (HM Customs & Revenue) or the court. As part of the grant of representation application you must show either that you have paid any Inheritance Tax due, or that there is no Inheritance Tax to pay.
When you choose our probate complete service we will take care of the relevant tax-related matters (excluding VAT) as part of the administration of the estate. Benefits we provide include a face to face discussion with a probate consultant over video call, and ongoing advice and support throughout the probate process.
We can also pay all the costs of a Co-op Funeralcare funeral, providing the estate owns sufficient assets which can be sold in due course to repay our costs.
What is an excepted estate and what is the excepted estate limit?
An excepted estate means that no Inheritance Tax is due. There are 3 main reasons why an estate would not have to pay Inheritance Tax.
1. The value of the estate is below the current Inheritance Tax threshold
Inheritance Tax is only due if the total value of the estate is over the Inheritance Tax threshold, which is currently £325,000. This is also called the nil rate band and is sometimes referred to as the excepted estate limit. The personal representative must find out the total value of the estate. If this is less than £325,000, Inheritance Tax won’t be due.
This threshold may be higher if the deceased was married and their spouse died before them. This is because married couples can to combine their individual tax free thresholds.
There's also a residence nil rate band if the home of the person who has died is being left to their children or grandchildren. For more information on this see residence nil rate band explained.
2. It’s an exempt estate
Inheritance Tax won’t be due if the deceased leaves everything to a surviving spouse or a charity and the estate is worth less than £1m. This is called an exempt estate.
3. The deceased lived abroad
If the deceased was living abroad, Inheritance Tax might not be due in England and Wales. A ‘foreign domiciliary’ means that he/she lived abroad on a permanent basis, died abroad, and held few assets in the UK.
Even if you are dealing with an excepted estate, you’ll still need to complete Inheritance Tax forms when applying for probate. You must also be certain that Inheritance Tax is not payable, or HM Revenue & Customs may hold you accountable for the mistake.
Gifted property and Inheritance Tax explained
If the person who died transferred the ownership of their home to another person before they died, then Inheritance Tax may still be payable on it. It will depend on who the property was gifted to, how long before the death this happened, whether they continued living there after gifting it and how much the overall estate is worth.
Certain beneficiaries are exempt from Inheritance Tax, and this exemption also applies to lifetime gifts. If the person gifted their property to their spouse or civil partner, no Inheritance Tax would be payable. The same
If Inheritance Tax is payable
The grant of representation will not usually be issued until the Inheritance Tax (IHT) has been paid to HMRC. This can potentially cause a delay in the administration of the estate.
You will normally be expected to pay 10% of the tax due on the value of property and shares plus all of the tax due in respect of the rest of the estate. This tax payment should be made within six months of death, with the additional tax in respect of the property and shares payable in yearly instalments over a ten-year period, or as soon as they are sold. Interest will start to accrue on any outstanding Inheritance Tax after six months from the date of death.
If it comes to light that there are further assets in the estate, or the value of the estate has not been correctly stated, it may be necessary to provide HMRC with a corrective account and pay any additional tax due, or reclaim any tax that was overpaid.
How to pay Inheritance Tax
Before you can pay the Inheritance Tax bill, you will need to get a reference number from HMRC. Then you can then pay HMRC either directly from the estate or from your own funds and claim it back from the estate.
Raising the money to pay the Inheritance Tax bill may mean selling some of the assets in the estate. If there is no cash in the estate, you can arrange to pay the tax in instalments, but interest will be due on outstanding tax.
If you don't know exactly how much Inheritance Tax is owed (if, for example, you are waiting on a property sale to determine the full estate value) you can make payments on account before finding out the precise figure.
HMRC will not send out individual receipts for each payment made, they will only send a "clearance letter" once the entire bill has been paid (along with any interest). The best way to keep track of payments is to keep a record of these.
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