26 November 2018

Inheritance tax basics

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Inheritance tax used to be something only the wealthy expected to pay when they died. But soaring house prices have meant that many people who would never have seen themselves as rich now leave behind estates which attract inheritance tax.

If you are responsible for dealing with someone’s estate (this is broadly everything they own such as property, savings and possessions minus any debts), you will need to work out if there is any inheritance tax to pay to HMRC.

When is inheritance tax due?

There is normally no inheritance tax to pay if the person who died:

  • had an estate worth less than £325,000
  • left everything they own to their spouse, civil partner, a charity or a community amateur sports club

If they give away their home to their children (including adopted, foster or stepchildren) or grandchildren, they get an additional £125,000 exemption from inheritance tax which takes their inheritance tax threshold (the value of their estate before they have to start paying inheritance tax) to £450,000. The exemption rises to £150,000 in 2019/20, £175,000 in 2020/21 and by inflation after that.

If they were married or in a civil partnership and their partner’s estate was worth less than the inheritance tax threshold, they may be entitled to the unused part of the threshold. This means their threshold could be as much as £900,000 in the 2018/19 tax year.

How much is inheritance tax?

The standard rate of inheritance tax is 40% but it’s only charged on the part of the estate that is above the threshold.

So if an estate is worth £600,000, inheritance tax is typically due on the £275,000 above the deceased’s £325,000 threshold. At a rate of 40% this means there will be an inheritance tax bill of £110,000.

If the deceased has left 10% or more of their estate to charity, a reduced inheritance tax rate of 36% may apply.

How is inheritance tax paid?

Any inheritance tax due on an estate has to be paid to HMRC. This should be done by the person who is dealing with the deceased’s estate. If they left a will they will probably have named those people in it (known as their executors). If there is no will the estate is typically dealt with by a relative.

Valuing someone’s estate can be tricky but the government website gov.uk has lots of useful information on how to do this.

Once you’ve estimated the value of the estate you can register online to complete an inheritance tax estate report. This will tell you if you can report everything online or if you need a paper form, if there’s inheritance tax to pay and when to pay it.

You can save and return to the online form once you’ve started the registration process.

Paying an inheritance tax bill

You must pay inheritance tax by the end of the sixth month after the person died. You’ll need to get a payment reference number before you can pay your inheritance tax bill. You can pay from your own bank account or a joint account you have with the deceased.

If there is not enough money available to pay the inheritance tax bill from your or the deceased’s bank accounts, the deceased may have some life insurance written in trust that could be used to help pay the bill or you may be able to get an executor’s loan from a bank.

You can claim back the money from the deceased’s estate or the beneficiaries once you get a Grant of Representation (also known as probate or letters of administration). This is called Confirmation in Scotland.

You can find out more about how to pay an inheritance tax bill on the government website and if you would like further help understanding your inheritance tax responsibilities contact the government inheritance tax helpline.