Tax doesn't have to be taxing - so why is it?
Inheritance Tax (IHT) is a tax that is paid upon a deceased’s Estate if it is over a set threshold, therefore it does not apply to all Estates.
IHT will not be owed if the value of the Estate is below £325,000 (the current threshold), or if everything over the threshold is left to either a spouse, civil partner, a charity or a community amateur sports club.
Even if IHT is not owed, this is still an important step in the probate process, as there are still forms to be filled out. These forms, as will be mentioned later, will need to be sent to HMRC when submitting the probate application form.
Inheritance Tax and when to pay it
Inheritance Tax is owed on anything above the threshold (£325,000) at 40%. The Government website provides the most up-to-date threshold information.
The percentage of IHT owed is reduced to 36% if the deceased left at least 10% of the value of their Estate to charity in their Will.
IHT is due 6 months (from the end of the month) after the person has died. Interest will be incurred on any unpaid amounts of IHT after the 6 month period has passed. You can make IHT payments before you know the exact amount of IHT owed by the deceased’s Estate. These payments are called payments on account.
As mentioned above, every individual’s Estate (including gifts) can value up to the current threshold of £325,000 without paying Inheritance Tax. This is referred to as the Nil Rate Band (NRB). Anything within the NRB is not taxable, but anything over this will be taxed.
The NRB also allows an individual to claim their pre-deceased’s spouse or civil partner NRB allowance. This means that if everything from the first death went to the surviving spouse or civil partner from the deceased, then 100% of the allowance from the first person can be claimed. So this will allow another £325,000 to be included in the NRB, which will not be taxed. However, if some of the Estate was given elsewhere after the first person’s death, then only the remaining amount, that was left to the spouse or civil partner may be claimed. This will be calculated as a percentage, due to the NRB changing over time. So, if after the first death the surviving spouse or civil partner was given 80% of the Estate, whilst the remaining 20% was split between their two children, only 80% of the first deceased’s NRB can be claimed.
There has also recently been introduced a residence nil rate band (RNRB) which is an additional threshold which you may receive, on top of the existing allowance, if you pass on a main residence. In 2020/21 the RNRB allowance was £175,000, meaning that the total allowance the deceased may have is £500,000. The maximum possible RNRB for an Estate is currently £175,000, but if the property being left is worth less than this, then only the property price will apply. The remaining RNRB will be available to transfer to a surviving spouse or civil partner.
The government website covers how the NRB and RNRB may apply in different situations.
IHT forms may be completed online. You will need to have valued the deceased’s Estate prior to this point to know whether IHT is owed.
If the Estate is under the IHT threshold, then you will need to fill out the form IHT205.
If the Estate is over the threshold, you will need to fill out the form IHT400. When filling out the IHT400 form, you may also be required to fill out further IHT forms that relate to things such as Residence Nil Rate Band, gifts transferred, bank and building society accounts the deceased had, and other relevant areas and Estate that will be needed to have a complete account of the Estate and work out the Inheritance Tax. These are clearly listed on the IHT400 form.
The government website provides notes to help and support you when filling in the IHT forms.
You will have 6 months, from the end of the month in which the person died. to pay IHT. If there is enough money in the deceased’s bank account, it should be possible to arrange a payment to HMRC to pay for the IHT. Most banks in the UK will permit this, but you will need to send an IHT423 form.
You need to pay any Inheritance Tax before you can get a Grant of Probate.
Changes during Coronavirus
The IHT forms require signatures usually from the Executor(s)/Administrator(s) of the Estate (who may also be referred to as a legal personal representative) and any trustees. However, due to rules around social distancing, signing these forms is becoming a challenge. Therefore, it is now temporarily possible to have printed signatures on IHT400 and IHT100 forms.
Currently, as long as the names and details of the legal personal representatives are on the declaration page of the form, and the account has been seen by all of the legal personal representatives and they have agreed to be bound by the declaration then this is sufficient.
An agent who is acting on behalf of another legal personal representatives in this situation must also include a statement, ‘As the agent acting on their behalf, I confirm that all the people whose names appear on the declaration page of this Inheritance Tax Return have both seen the Inheritance Tax Return and agreed to be bound by the declaration on page … of the form IHT…’.
Another change is that you can no longer send IHT payments by cheque, they must be made with another method of payment such as Faster Payments.
These changes may only be temporary, but currently they are worth being aware of. It is also important to keep an eye on the government website for any other updates or changes around this process.