A Guide to Inheritance Tax UK
Inheritance tax UK is considered as a transfer tax on the estate (property, money, or possessions) of an individual who has died.
How Much is Inheritance Tax UK?
If the value of your estate is above the Nil Rate Band, that is, Euro 325,000, then the value of your estate above this threshold is taxable at a rate of 40%. For instance, if your estate value is Euro 500,000 and the NRB is Euro 325,000, then a 40% tax will be charged on Euro 175,000. The tax payable amount will be Euro 70,000.
You don’t have to pay inheritance tax in the following cases:
- If the net worth of your estate is below Euro 325,000, which is the Nil Rate Band (NRB);
- If you leave an estate above the threshold to your civil partner or spouse; or
- If you leave the value above the threshold to an exempt beneficiary.
The value of the NRB will be fixed until 2021; however, if you are a surviving civil partner or are widowed, the amount can be increased. Couples can transfer the surplus value when the first spouse dies. The NRB can be increased up to Euro 650,000. This extra amount is referred to as Transferable Nil Rate Bate (TNRB).
Residence Nil-Rate Band – A New Aspect of Inheritance Tax UK
The Residence Nil-rate Band was introduced in 2017. It is an additional property allowance, enabling people to leave their homes to their families without tax. Under this rule, if you pass your home to a direct descendant, you are liable for an allowance. Your direct descendant includes your children, adopted children, grandchildren, foster children, etc. Siblings, nephews, or nieces are not eligible for this allowance. The current Residence Nil-rate Band allowance is Euro 125,000; however, the value is set to increase to Euro 175,000 by 2020–2021.
Properties that Qualify for Nil-Rate Band
The Residence Nil-Rate Band is only applicable to your main residence and it must be a part of your estate. If you own multiple properties, the estate executor can nominate which house should be used for allowance. If you own a larger estate, the amount of the Residence Nil-rate Band decreases; this is known as tapering.
The Process of Estate Valuation
During the valuation of your estate, all your assets are listed and their values are assessed at the time of your death. Your assets include property, land, money, jewellery, shares, cars, insurance policies, and joint-owned assets. Furthermore, all debts and liabilities are deducted from it. Gifts are also considered as a part of your asset if they are given seven years before your death. You will also need to include gifts that are given before this period if you continue to benefit from them at the present time. Such gifts are denoted as ‘gifts with reservation of benefits’.
Liabilities and debts reduce the value of the chargeable estate. In this, you can include mortgage, household bills, and credit card debts. However, expenses that incur post your death are not deductible.
When is Inheritance Tax UK paid and by Whom?
If you have written a will, then the executor is responsible for paying the inheritance tax . However, if there is no will, the administrator of the estate pays off the tax. The tax can be paid from the estate fund or money raised by the sale of any assets. Generally, the inheritance tax is paid via a Direct Payment Scheme (DPS). If the deceased person had money in the bank, then the executor or administrator of the estate can ask to pay off the inheritance tax directly from the account via DPS.
Payments from the life insurance policy can also be used to pay inheritance tax. However, by mentioning the policy in your Trust, you can avoid the tax. This also eliminates the strenuous probate process.
Inheritance Tax must be cleared within six months after the death of an individual. If the tax amount is not paid within this period, the HMRC will begin to charge interest. The executor can choose to pay IHT on the assets in installments. However, interest will be charged on the outstanding amount. Moreover, if the assets are sold before the tax is completely paid, it is the responsibility of the executors to pay off all the installments along with interest. If the executors pay the IHT from their bank, they can claim it back from the estate.
It is recommended that some of the amount, if not all, is paid within six months of the death, even if the estate valuation isn’t finished. This will help in reducing the amount of interest that the executor will have to pay if it takes longer to sell assets to pay off the taxes and debts. Moreover, the HMRC will refund any amount paid in excess as an inheritance tax post probate. To avoid penalties, estate executors and administrators have to complete the essential estate documents within one year of the death of the person.