Inheritance Tax

A Simple Guide To Inheritance Tax

8 April 2020 by Mark Tucker

What is Inheritance Tax?

When someone passes away, inheritance tax is something which is applied to their estate.

Inheritance tax (or the potential of it), is another reason why it is important to detail your wishes and also list any beneficiaries in your will. Every person has an allowance, or tax threshold, of £325,000.

Your estate won’t have to pay inheritance tax if:

the  value of your estate is below the £325,000 threshold.
you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club, for example

Please note: if a loved one has passed away and their estate is under the threshold, you will still need to report it to HMRC.

If you don’t have a Will, your inheritance tax will be calculated and paid by the administrator. It can be paid from funds of the estate or by the sale of assets in the estate. Alternatively, if you do have a Will, it is usually the executor who will handle the payment and again, funds can be used to pay from the estate. Once all the tax and debts are paid, the executor or administrator can distribute what remains of the estate.

How much is Inheritance Tax?

Every individual has a threshold (or allowance) of £325,000. If the value of your estate is above this (also known as the NRB – Nil Rate Band), then the part of your estate above it might be liable for tax at the rate of 40%. (Similar to the process applied to income tax.)

Your inheritance tax threshold could increase to as much as £950,000. If you are married or in a civil partnership and your individual estate is worth less than the £325,000 threshold, any unused threshold can then be added to your partner’s when you pass away. This extra transferable element is known as Transferable Nil Rate Band (TNRB).

Your threshold can also increase (as much as £475,00) if, on death, you pass your home to your children or grandchild. This can include stepchildren, foster or adopted.

An example:

If your estate is worth £525,000 and your IHT threshold is £325,000, the tax charged will be on £200,000 (£525,000 – £325,000). The tax would be £80,000 (40% of £200,000).*

The Inheritance Tax NRB is fixed at £325,000 until 2021.

There is also been a relatively new introduction, known as The Residence Nil Rate Band (RNRB); also known as the ‘home allowance’.

This (RNRB) is on top of the NRB and the Transferable Nil Rate Band (see below) (TNRB), and to quality for it you must pass on your home or a share of it to your children or grandchildren.

(This can also include step-children, adopted or foster children.)

When does Inheritance Tax have to be paid?

Inheritance tax needs to be paid by the end of six months after the person has passed away. If it not paid by this period, HMRC can start charging interest.

If you have been appointed ‘executor’ or ‘administrator’ of the estate, you will need to complete and send in an account of the estate within a year of the death to avoid a penalty.

Tax on assets can be paid by instalments over a period of time and you will need to obtain an IHT reference number (a minimum of 3 weeks) before any payment can be made.

For more assistance with inheritance tax, please contact us.

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