Dealing with Inheritance Tax
Inheritance tax (IHT) is a tax charged on the property, money and possessions (the estate) of someone who has died. The tax is usually paid by the executor from the funds in the estate, or the executors will need to take a loan if the estate has no cash. Once the tax has been paid, probate can be obtained and the assets of the estate either sold or distributed to the beneficiaries.
How IHT works
There is a tax-free allowance called the ‘nil-rate-band’, which is currently £325,000. In general terms, if the value of the estate exceeds this figure, and the estate is not left to a spouse or civil partner or to a charity, (and is not eligible for reliefs such as agricultural or business relief) then the excess will be liable to IHT at 40%.
Application of the nil-rate band
In the case of married couples and civil partners, it is possible to pass any unused portion of their nil-rate band on to their spouse or civil partner, which could bring the nil-rate band available on the second death to £650,000 (using current limits).
From April 2017, estates are set to benefit from an additional ‘residential nil-rate band’ (RNRB) of £100,000 (rising to £175,000 by April 2020) where the deceased’s residence is left to their direct descendants (children, step-children, adopted and fostered children and their respective spouses and civil partners).
From 2020, if the nil-rate band and RNRB are both rolled over unused on the first death to the surviving spouse or civil partner, on the second death it would mean there would be a tax-free nil rate band of £1m available.
The benefit of the tax free RNRB is not available where the property exceeds £2m. the potential RNRB is tapered down by £1, for every £2 of value over £2m, such that properties worth more than £2.35m would not benefit from the RNRB in the above example.
Paying the tax
In order to obtain probate, it is necessary to first pay the tax to HMRC and obtain a formal receipt which needs to be submitted with the probate application.
Where estate assets consist of land or unquoted shares, IHT on those assets can be paid by ten yearly instalments if there is not enough cash in the estate to pay it straight away. Interest becomes payable on any outstanding inheritance tax six months after the end of the month in which the death occurs.
Tax can be taxing at the best of times; many executors look to us to provide the up-to-date knowledge and professional expertise needed to handle this often-complex and very important aspect of administering an estate.
We offer tax planning advice to individuals and families to help ensure that on death the amount of IHT payable on their estates is kept to a minimum.
