When someone dies, their estate may be liable to pay an Inheritance Tax (IHT) bill. We look at how to tell whether IHT is due and how it is calculated.
The person responsible for dealing with someone’s affairs after their death, known as their personal representative, will need to work out whether any IHT is payable. Firstly, they will need to wind up the estate by collecting all the assets and valuing them. This will include sale or transfer of any property the deceased may have owned.
Any debts, bills and expenses can be subtracted from the money in the estate, then the amount remaining is added up, to calculate the net value. Any lifetime gifts made within the seven years before death should also be added to the total. A lifetime gift is a cash sum or valuable item given by the deceased from their savings or assets. There is an annual allowance of £3,000 per person giving the gift, so only sums over this threshold need to be added to the estate total. If the allowance isn’t used one year, it can be carried over to the next, but only to a maximum of £6,000.
If the net value of the estate is over £325,000, known as the nil rate band, then IHT will be payable at 40% on the amount over this level. An exemption is made (a transferable nil rate band) if the deceased is married and leaves everything to their spouse. In that case, when the spouse dies, a threshold of £650,000 will apply. A further exemption, (a residential nil rate band) is also available in some instances when a property is passed on to the deceased’s direct descendants.
Once the personal representative has worked out whether IHT is due, they will need to contact HM Revenue and Customs (HMRC) and make arrangements to agree and pay the tax bill. Payment will be due within six months from the end of the month in which the deceased died.
If sufficient funds are not available, HMRC may accept payment in instalments with interest being charged. Late payments will be subject to penalties plus interest.
IHT calculations can be complex, with the inclusion of lifetime gifts and application of transferable and nil rate bands, so when an estate is over the IHT threshold it can be helpful to seek professional advice. A tax and probate expert will be able to calculate the exact amount due and advise on methods of payment.
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