What is inheritance tax?

As long ago as 1789, Benjamin Franklin wrote that, “In this world nothing can be said to be certain, except death and taxes.” Unfortunately, in our modern world death and taxes can be inextricably linked, although in Britain you will not be faced with an inheritance tax demand from HMRC unless the estate of a deceased person that you are administering has a net value of more than £325,000.

The threshold of £325,000 will not apply when a spouse or civil partner survives and property, bank accounts and other assets are jointly owned in which case the spouse or civil partner can inherit the estate in its entirety without paying inheritance tax.

The person who has the legal responsibility of paying the inheritance tax is the executor who will have been named in the deceased person’s will. Where there is no will, someone will have to be nominated as the administrator, usually a close relative. Whether or not there is a will, you can engage a solicitor, an accountant or another professional adviser to handle the administrative affairs of the estate. These include applying for probate as well as dealing with HMRC.

Inheritance tax is levied at a rate of 40% on the amount that the estate exceeds £325,000, although this rate will be reduced to 36% if 10% or more of the estate’s value has been donated to charity. If you believe that no tax will be due on the estate as its value falls below the £325,000 threshold, then you need to fill in form IHT205. If you believe inheritance tax will be due, form IHT400 must be completed. HMRC calls an estate where no tax is due an ‘excepted estate’.

Obviously, to find out if an estate will be liable for inheritance tax, you need to calculate the value of the estate. To do this you need to identify all the assets and work out what the values are. HMRC expects values to be the market value at the time of death, and they recommend that anything that is worth more than £500 should be professionally valued.

Once you know the total value of the estate, you then need to calculate all of the liabilities that the estate has such as bank loans, credit card balances and outstanding bills to bodies like utility companies. You then subtract the sum of the liabilities from the total of the assets to get the net worth of the estate.

The deadline for paying inheritance tax is normally at the end of the sixth month after the month that the person died in. If the estate has insufficient cash to pay the tax and it will take longer than six months to dispose of assets like property, you can pay the tax in instalments over 10 years, but you will have to pay interest on the tax due.

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