Probate and Inheritance Tax

Probate and Inheritance Tax

Inheritance tax has attracted a lot of negative media attention, with many describing the tax as ‘complex and confusing’ and in need of a complete overhaul. With £5.38 billion in inheritance tax paid to the UK government in 2018/2019, it is important for Executors and Administrators to understand this tax regime and the implications when handling the estate of someone who has died.

What is Inheritance Tax?

Inheritance Tax is a tax paid mainly when someone dies. It is worked out on the net value of an estate i.e. the value of assets less debts outstanding at death such as a mortgage and credit card balances, less any exemptions or allowances.

What is the standard rate of Inheritance Tax on death? 

The rate of tax is an eyewatering 40% for most estates where tax is due.

Do I have to report the value of the estate to HMRC? 

The current position is that all estates requiring a Grant of Representation/Probate (‘Grant’) need to be reported to HM Revenue & Customs (HMRC) whether tax is payable or not. On making an application for the Grant, an inheritance tax account needs to be prepared, either an IHT205 which is a reduced account or an IHT400 a full account.

As the Executor or Administrator of the estate, you must identify and submit the correct account depending on the circumstances of the estate and the reliefs/exemptions being claimed.

Changes are coming following the Government’s announcement on 23rd March as part of Tax Day.

From January 2022, the requirement to complete inheritance tax paperwork will be dropped for estates with a value significantly under the threshold after probate – a change expected to cover more than 90% of estates. The precise details are not yet set out but it is an indication of the government’s aims of sharpening up the administration of tax collection rather than making radical changes to policy.

How soon after death is Inheritance Tax payable? 

Inheritance tax must be paid before the Grant of Representation (Probate) is issued. This presents a number of challenges if you need the Grant to encash assets. Many financial organisations such as banks recognise this dilemma and will often release cash directly to HMRC to settle the tax before the issue of the Grant.

Where there is no access to liquid assets at the date of death to fund the Inheritance Tax liability, options are limited.  In these circumstances, you may need to look to the estate beneficiaries to introduce the funds or look for an inheritance tax loan which will inevitably include high interest rate charges.

Inheritance tax must be paid six months from the end of the month in which the death occurred. If not paid in this timescale, interest is payable to HMRC. You will receive a penalty in addition to the interest payable if the death is not reported to HMRC within 12 months of death. These timescales have led to many challenges during the COVID pandemic where financial organisations have been slow to provide the date of death valuations required to prepare the inheritance tax accounts.

Are there any reliefs of exemptions available to reduce Inheritance Tax?

There are a number of reliefs and exemptions available, so it is important that you identify and claim these within set timescales. These include:

  • the nil rate band
  • transferrable nil rate band
  • residence nil rate band
  • transferrable residence nil rate band
  • spouse/charitable relief
  • business/agricultural property relief
  • gifts out of excess income

Failure to identify and claim reliefs within the defined timescales can prove very costly for the estate beneficiaries who will receive a reduced inheritance.

Is there a reduced tax rate for leaving money to charity? 

In an attempt to make gifting money to charity attractive to UK taxpayers, in April 2012 the government introduced a reduced rate of tax (36%) for estates where 10% of the net value is left to charities. This provided a real incentive to taxpayers to benefit charities whilst reducing their liability and maximising the inheritance left to their loved ones.

How can I reduce Inheritance Tax? 

There are a number of steps that you can take now to reduce the tax liability on your own estate. You can seek estate planning advice to understand how the inheritance tax regime applies to your personal circumstances and take action to maximise the inheritance you want to pass on to your loved ones.

As inheritance tax rules change, it is important to review your circumstances and your Will regularly.

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