A Brief Guide to Inheritance Tax

There are a lot of things to think about in the aftermath of a bereavement. Some are emotional, some are practical and some are legal obligations.

Inheritance tax falls into the third category. Though it’s unlikely to be something you want to think about, if you’re responsible for administering the estate of someone who has died, you will need to make sure all the legal obligations in this matter have been met.

What is inheritance tax?

Inheritance tax is a tax paid on an estate after a death. It is only payable on estates that are worth more than the nil rate band (currently fixed at £325,000 until 2026) and do not meet certain exemption criteria (we’ve explained more about this below).

The rate of inheritance tax is 40%, but this is only payable on the portion of the estate that is above the nil rate band. For example, if an estate worth £400,000 was subject to a standard nil rate band of £325,000, the executors or administrators (known collectively as personal representatives) would only need to pay 40% of £75,000.

In certain cases, estates may benefit from a higher nil rate band. For example, when someone who is married or in a civil partnership dies and leaves their estate to their spouse or civil partner, there will be no inheritance tax to pay on that first death. Then, on the second death, some or all of the nil rate band belonging to the first spouse may be transferred to the second. This means that when the surviving spouse or civil partner dies, the survivor’s estate could benefit from all or part of the nil rate band belonging to both individuals, which means a total nil rate band allowance of up to £650,000.

There are also sometimes additional nil rate band allowances of up to £500,000 if the individual who has died leaves their home to their children or grandchildren. This is called the residence nil rate band.

In practice, only relatively few estates are subject to inheritance tax. However, even if no inheritance tax is due, you will still need to report the value of the estate you are administering to HMRC in order to confirm this.

If you’d like to get an idea of how much inheritance tax might be be due on an estate, take a look at our quick and simple inheritance tax calculator.

Are there exemptions?

There are a number of exemptions to inheritance tax. It does not need to be paid on estates where:

  • The total value of the estate is under the nil rate band
  • Everything above the nil rate band is being left to a surviving spouse or civil partner
  • Everything above the nil rate band is being left to an exempt beneficiary, such as a charity

Again, even if the estate you are responsible for is exempt from paying inheritance tax, you will still need to complete an inheritance tax form for HMRC.

How is inheritance tax paid?

When administering an estate, the first step would be for personal representatives to assess the estate. Once they have valued the full estate (the value of any assets minus the amount of any debts), they would then need to report this information to HMRC by completing and submitting the IHT400 form.

When HMRC has received this information, they will send a bill for any tax that is due. Some of this will need to be paid before you’ll be able to apply for a Grant of Probate or Letters of Administration.

The total inheritance tax on an estate is due at the end of the sixth month after the person has died. After this point, HMRC will start charging interest.

The personal representative is responsible for making the payment. They can do this in three ways:

  1. By covering the cost with their own funds, which can be claimed back from the estate once probate has been granted.
  2. Using the proceeds of anything that has been sold on behalf of the estate (e.g. property, antiques or vehicles).
  3. By arranging for a direct payment from a bank account belonging to the person who has died. This can usually be arranged for inheritance tax purposes even if probate has not yet been granted.

What happens after you’ve completed your IHT400 form?

Our handy guide which explains all the legal responsibilities concerning IHT 400 forms and what to expect.

What happens if you don’t pay any inheritance tax that is due?

It is a legal obligation for a personal representative to report to HMRC about the value of the estate they are administering and to pay any inheritance tax that is due.

If the inheritance tax isn’t paid by the end of the sixth month after the individual has died, HMRC will start adding interest to the amount due. In certain situations, they may also add financial penalties.

Of course, it might not be possible to pay all the inheritance tax due on an estate within a six month period. This could be because the estate is primarily made up of property (such as a family home) and the tax could not be paid without selling the property. In cases such as these, it’s possible to arrange with HMRC for the tax to be paid in instalments over a period of up to 10 years.

Failing to report the true value of on estate – or reporting it incorrectly – can lead to penalties. It’s important to understand that the personal representative of an estate is considered legally responsible for it, so they may find themselves personally responsible for these penalties.

If you are having trouble understanding what is due in terms of inheritance tax, or are unsure of how you will pay it, it may be helpful to seek professional advice. A specialist probate solicitor will be able to ensure the estate pays the correct amount of inheritance tax and advise you on payment options, such as paying in instalments.

If you’re concerned about the amount of inheritance tax that will be payable on your estate, you might want to find out more about how you can prepare your estate to minimise the bill and make use of available exemptions.

How Roche Legal can help

We are reassuring experts who can help you with a wide range of legal matters. Please get in touch if you need legal support with:

Need further help?

If you would like to discuss inheritance tax or need advice on any other aspect of administering an estate, please contact us.

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