Answering your Inheritance Tax (IHT) questions
What is inheritance tax?
Inheritance tax – or IHT as it is also known – is the tax that is charged on the value of a deceased person’s estate.
How much tax do you pay on inheritance?
Inheritance Tax is charged at 40 per cent of the value of the estate that falls above the nil rate band, which is currently set at £325,000 for a single person. In the 2019/2020 tax year the average inheritance tax bill was around £200,000. An IHT bill needs to be settled before any inheritance can be released to the beneficiaries.
What amount of inheritance is taxable?
A typical IHT scenario example: If an estate is worth £525,000 the tax charged will be on £200,000 (£525,000 less the £325,000 allowance for a single person). The inheritance tax therefore that would need to be paid would be 40 per cent of £200,000 which is £80,000.
Do you have to pay tax when you receive an inheritance?
Inheritance tax needs to be paid before any estate can be distributed, but that doesn’t mean everyone due to receive an inheritance is liable to pay IHT. If there is a will the executor is liable to settle the inheritance tax bill. However, if a will hasn’t been left then the responsibility will fall to the administrator of the estate. Only once the inheritance tax and any debts have been settled can the executor or administrator distribute the estate to beneficiaries. This is because the executor or administrator needs the Grant of Probate in order to dispose of the estate assets, and they are not able to get a Grant of Probate until the IHT has been paid to HMRC.
When do you need to pay inheritance tax?
Each year around 24,500 deaths result in an inheritance tax bill – a figure that continues to rise. You need to pay inheritance tax if the estate that has been left is more valuable than the £325,000 threshold for a single person. However, there are some IHT exceptions:
- The value of the estate is below the £325,000 threshold
- Anything above the threshold is left to a spouse or civil partner
- Anything above the threshold is left to an exempt beneficiary, such as a charity or community amateur sports club
There are also other very specific exemptions. The estates of people who die while in active service, such as those in the armed forces, police and paramedics are exempt. This exemption also applies if a person is injured on active service and has their death hastened by the injury. This applies even if they have left active service at the time of their death.
When does inheritance tax have to be paid?
How long do you get to pay inheritance tax? Inheritance tax has to be paid before probate can be granted, and within six months of the person’s death. Probate is the right to deal with the deceased person’s property, money and possessions. In Scotland this is called Confirmation.
The longer it takes for an IHT bill to be paid the more interest is added. Currently the interest rate is set at 2.6 per cent for late payments. HMRC will refund the estate if it has overpaid IHT once probate has been granted.
Does a wife pay inheritance tax when a husband dies?
Or vice versa. The rules for couples can be confusing. On death assets can pass between married couples or those in a civil partnership without attracting tax. When the second person dies the estate qualifies for a married couple’s transferable allowance, which is the sum of two single people’s allowance, or £650,000. This extra transferable element is known as Transferable Nil Rate Band (TNRB).
There is no specific IHT allowance or exception for cohabiting couples, so if you’re not married, but own assets jointly, the situation can get complicated – especially where property is concerned. If you’re joint tenants – meaning you both own all of the property – and your partner left you everything in their will, then if the assets (including the property) exceed the inheritance tax threshold of £325,000 then you have to pay a 40 per cent tax bill of any estate value above that. After your partner’s death the property would be owned by you in its entirety. If there was no will, the property can still be transferred to you through the ‘right of survivorship’ and the same inheritance tax rules would apply. However, without a will any family members of your partner would have a right to claim their share of other assets left.
What do you pay inheritance tax on?
IHT is paid on the total value of the estate left by the deceased which includes bank accounts, pensions, properties, jewellery, vehicles, shares, jointly owned assets and pay-outs from insurance policies. However, it is the net value of the estate after any debts have been accounted for such as debts/mortgages, funeral expenses, other taxes, or other expenses incurred in managing the estate.
Gifts made by the deceased person prior to their death, however, can be IHT exempt – but there are strict rules. While someone is still alive, they can gift as much as they want, to anyone they want, in the form of ‘potentially exempt transfers’ (‘PETs’). However, if that person passes away, those gifts (or PETs) can then be included in the estate of the deceased person. Under the current rules if the gift is given before death and the donor lives for more than 7 years after any assets were given it will be IHT exempt. However, if the donor dies sooner IHT will be charged on the gifts at various levels. If the giver dies:
- Within 3 years of giving the gift – 40 per cent
- Within 3 to 4 years – 32 per cent
- Within 4 to 5 years – 24 per cent
- Within 5 to 6 years – 16 per cent
- Within 6 to 7 years – 8 per cent
- After more than 7 years – 0 per cent
- Parents can gift cash up to £5,000
- Grandparents can gift up to £2,500 each
- Anyone else can gift up to £1,000
Do you pay inheritance tax on a house?
Yes and no – it depends on whether you’re a child or grandchild of the deceased.
If a house (which was the primary residence of the deceased) has been left to direct descendants, for example children or grandchildren of the deceased, then they can access a further tax-free allowance of up to £175,000 per person which is in addition to the £325,000 threshold for a single person. This is called the ‘Residence Nil Rate Band’ (‘RNRB’) and it can be passed on to children and grandchildren only. This means that inheritance tax may not be due on the first £500,000 of the estate per individual.
For couples, where the estate passes to the surviving spouse before passing to the descendants, and the main property is left to direct descendants, it is possible to have up to £1m in tax-free allowance (£325,000 per person nil rate band and £175,000 per person RNRB).
However, the £175,000 RNRB allowance only applies if the estate that’s been left is worth less than £2m. On estates that are worth in excess of £2m the RNRB allowance will decrease by £1 for every £2 above £2m that the deceased estate is worth.
If the property has been left to beneficiaries who aren’t direct descendants of the deceased then an IHT bill of 40 per cent will be liable for anything over the £325,000 single person allowance.
How do I pay inheritance tax?
An executor or administrator can pay inheritance tax from their own bank account using the IHT reference number online or by telephone banking, CHAPS or BACS and/or at your bank. They can also make payment from any joint accounts held with the deceased. Any amount paid can be later reclaimed from the deceased’s estate once probate has been granted.
But what happens if the money needed to settle the IHT bill isn’t available?
Unfortunately this is a common occurrence and is a classic ‘chicken and egg’ situation – where the executor or administrator needs the Grant of Probate in order to start disposing of the estate assets in order to generate money to settle the IHT bill, but can’t get the Grant of Probate until they have paid the IHT.
Each year an estimated 2,000 families are unable to afford the average up front IHT bill of around £200,000.
Regulated by the Financial Conduct Authority, the Tower Street Finance IHT Loan is paid directly to the Inland Revenue, allowing families to start the legal process and receive their inheritance. The IHT Loan is paid directly to HMRC, there are no credit checks, no charge over property, no personal liability, or monthly repayments. The loan is repaid from the estate funds once it is ready to distribute. There is a 2 per cent origination fee, capped at £1,500 which can be added to the loan, and a fixed yearly interest rate of 19.6 per cent. Interest roll up is capped at 30 months. The IHT Loan is the second product from Tower Street Finance. It also offers its award-winning Inheritance Advance, a product for beneficiaries who want to access their inheritance more quickly than the 9 to 12 months it usually takes.
How you can find out more about the IHT Loan
The IHT Loan is a new product from Tower Street Finance that can help executors (or personal representatives if there’s no will) will estates where there is an Inheritance Tax (IHT) liability to pay but no funds available, and it is holding up the legal process.
Find out more by clicking here.