Not everyone is liable for inheritance tax (IHT). It is only due if your estate including property, possessions, money and investments, together with any assets held in trust and gifts made within seven years of death, is valued over the current IHT threshold of £312,000. The tax payable is 40 per cent on the amount over the threshold. The executor or personal representative usually pays the tax from the deceased’s estate. Trustees usually pay the tax on trust assets.
There are a number of exemptions which allow you to pass on amounts (during your lifetime or in your will) without any inheritance tax being due, for example:
- If your estate passes to your husband, wife or civil partner and you both have a permanent home in the UK there is no inheritance tax to pay even if it is above the inheritance tax threshold.
- Most gifts made more than seven years before your death are exempt.
- Other gifts, such as wedding gifts and gifts in anticipation of a civil partnership up to £5000 (depending on the relationship between the giver and recipient), gifts to charity and £3000 given away each year are also exempt. Parents can each give £5000. Grandparents and other relatives can each give £2,500; anyone else can give £1000.
Importantly, gifts made to your unmarried partner or a partner with whom you’ve not formed a civil partnership are not exempt.
You are allowed to give away £3000 in each tax year without paying inheritance tax. You can carry forward all or any part of the £3000 exemption you do not use to the next year but no further. For example, you could give away up to £6000 in any one year if you had not used any of your exemption from the year before.
Normal Expenditure Gifts
Any gifts made from your after-tax income (but not your capital) are exempt from inheritance tax if they are part of your normal expenditure. These include:
- Monthly or regular payments to someone or anniversary, birthday or Christmas gifts.
- Life insurance premiums for you or someone else.
You can make inheritance tax-free maintenance payments to:
- Your husband, wife or civil partner.
- Your ex-spouse or former civil partner.
- Relatives who are dependent on you due to old age or infirmity.
- Your children (including adopted and step-children who are under 18 or in full-time education.
Potentially Exempt Transfers (PET)
If you as an individual make a gift in any of the situations listed below and it is not covered by one of the exemptions already described, it is known as a ‘potentially exempt transfer’ (PET). A PET is only free of inheritance tax if you live for seven years after you make the gift.
Gifts that count as a PET are gifts that you as an individual make to:
- Another individual
- A trust for someone who is disabled.
- A bereaved minor’s trust where, as the beneficiary of an Interest In Possession (IIP) trust (with an immediate entitlement following the death of the person who set up the trust), you decide to give up the right to receive anything from that trust or that right comes to an end for any other reason during your lifetime.
Inheritance Tax on Transfers into Trusts and Companies
Transfers into most types of existing or newly created trusts above the IHT nil rate band will be charged 20 per cent inheritance tax on the amount exceeding that band. The tax is payable by the person making the transfer. There are certain trusts that are exempt from these rules. Please use our Search Facility below to find an inheritance tax expert within your region.
Valuing an Estate for Inheritance Tax
When valuing a deceased person’s estate you need to include all the property, possessions and money they owned at the time of their death, and assets they gave away during the seven years prior to death. The valuation must reflect accurately what those assets would fetch on the open market at the date of death.
1) Take the value of all the assets that they own in their own right, together with the value of:
- Their share of any assets that they own jointly with someone else.
- Any assets held in a trust from which they had the right to benefit.
- Any assets which they had given away, but in which they kept an interest.
- Certain assets which they gave away within the last seven years (check which assets are exempt from inheritance tax).
2) From the above deduct everything that the deceased person owed, for example:
- Outstanding mortgages and other loans.
- All unpaid bills.
- Funeral expenses.
If the debts exceed the value of the assets owned by the person who has died, the difference cannot be set against the value of trust property included in the estate.
3) The value of all assets, less the deductible debts, is their estate. An inheritance tax rate of 40 per cent will be due on any amount over the threshold of £312,000.
Assistance when Valuing the Estate
Valuing most of the estate assets should be quite easy, for example, money in bank and building society accounts, stocks and shares. In other instances, you may need the help of a professional valuer (or chartered surveyor for valuing property). If you choose to utilise a valuer make sure you ask them for the ‘open market value’ of the asset. This represents a realistic selling price of an asset. If the affairs of the estate are complicated, it may be advisable to instruct a solicitor to help you value the estate, pay the tax, and administer the estate. To find an estate-related solicitor near you, please use our Search Facility below.
Deadlines for Paying Inheritance Tax
In most cases, Inheritance Tax must be paid within six months from the end of the month in which death occurred; otherwise interest is charged on the amount due.
Tax on some assets including land and buildings can be deferred and paid in instalments over 10 years.
Forms you need to Complete
If the estate is unlikely to be subject to Inheritance Tax (an ‘excepted estate’):
Resident in England and Wales – Forms IHT 205 and PAI – application for probate
Resident in Northern Ireland – Form IHT 205
To download forms see below.
If the estate is likely to be subject to Inheritance Tax
You will need to complete the following forms:
- IHT 400 plus any relevant supplementary forms
- IHT 421
- PAI and PAIA guide notes
To download these forms see the links below.
You can contact the Probate and Inheritance Tax helpline on: 0845 302 0900.