Inheritance Tax explained

What is Inheritance Tax (IHT)

Inheritance tax (IHT) is a tax charged on a deceased person’s net estate.

What is the Inheritance Tax Nil Rate Band

Every deceased person has an allowance of £325,000 which can be used in their estate if it has not already been used up by lifetime gifts in the seven years prior to their death. This £325,000 allowance is known as the nil rate band or the Inheritance Tax threshold. In addition to this, anything a loved one leaves to their spouse or civil partner (if they have the same domicile status) or UK registered charity will be exempt from inheritance tax regardless of the value of the estate.

What is the Residence Nil Rate Band

This is an additional tax-free allowance currently capped at £175,000 (or the value of your property if lower) which may be available to your estate in certain circumstances. If the estate qualifies for this, then this tax-free allowance can be applied on top of the usual Nil Rate Band allowing a total of up to £500,000 per individual to pass tax free. The Residence Nil Rate Band is available if the estate is below £2m, the deceased owned their own home which forms part of the estate now and they left it to certain relatives such as children, grandchildren or other direct descendants. Any unused Residence Nil Rate band can be transferred to a surviving spouse or civil partner.

How much is Inheritance Tax

As a general rule, inheritance tax is 40% on anything above the tax threshold of £325,000 (or £500,000 if the residence nil rate band also applies) although this could potentially be £1m of allowances for a married couple. If 10% or more of the estate’s net value is left to charity, then this can be reduced to 36%.

How to value the estate

Here you will need to work out the value of all of the deceased assets (i.e. everything they owned with a value) at the time of death, and then deduct any debts that they may have had. Once you know the net value of the estate and who is to receive the assets under the terms of the Will or intestacy rules, you will then know if Inheritance Tax is payable.

Married couples and civil partners

  • No inheritance tax is payable if you leave everything or everything above the available allowances to your spouse or civil partner (providing they have the same domicile status).
  • If you leave everything to your spouse or civil partner on the first death and don’t utilise your individual Nil Rate Band or Residence Nil Rate Band, then your spouse or civil partner can transfer the unused allowances to their own estate. This could potentially double the Nil Rate Band available up to £650,000 and the Residence Nil Rate Band to £350,000. This is known as the Transferrable Nil Rate Band and Transferrable Residence Nil Rate Band.

What is exempt from Inheritance Tax

  • If the value of the estate is worth less than the threshold of £325,000 / £500,000.
  • If you leave everything above the £325,000 nil rate band and £175,000 residence nil rate band to your spouse or civil partner or a UK registered charity
  • If your deceased spouse/civil partner did not use their Nil Rate Band or Residence Nil Rate Band, then any unused part can be used by the surviving spouse/civil partner not exceeding £650,000 / £1m.

Please note that lifetime gifts made by the deceased do affect the estate position and can render the estate subject to inheritance tax even if the above exemptions apply.

When does Inheritance Tax have to be paid

If Inheritance Tax is owed, then it is due to be paid six months after the end of the month of death – so if your loved one died on 2nd January 2024, then it is due to be paid 6 months from the 31st January 2024. You need to be aware that HMRC charge interest from the due date until the tax is paid.

What form needs to be completed

If the estate is liable for Inheritance Tax, then form IHT400 needs to be completed and filed with HMRC. The Executor/Administrator must obtain a unique reference code for the estate from HMRC and pay a certain sum of Inheritance Tax on filing the form IHT400. A Grant of Probate/Letters of Administration will not be issued until a sufficient amount of Inheritance Tax has been paid.

When can you apply for probate

If there is no Inheritance Tax to pay, you can proceed to complete the probate application online or if you do not qualify to apply online prepare application form PA1P (if there is a Will) and PA1A (if there is no Will).

If there is inheritance tax to pay, then you need to wait for HMRC to send a code to confirm that the Inheritance Tax account has been processed. You will need this code for your probate application. Once you have this code, you can then proceed to prepare the probate application online or if you do not qualify to apply online prepare the application form PA1P or PA1A.

Can I deal with probate myself:

It is possible for you to deal with Probate yourself, but it can be stressful or overwhelming, and sometimes complicated. It also carries risk because as an Executor/Administrator you will be personally responsible for making sure the estate is dealt with correctly such as interpreting the rules of intestacy or the terms of the Will, reporting to HMRC, declaring the estate position to the Court, dealing with any unpaid debts or if the beneficiary does not receive the correct inheritance. To avoid any stress or risk to you, you can always instruct a firm of solicitors to deal with this on your behalf. My Probate Solicitors are here to help, and we will support you throughout the journey.

This note is not intended to give specific legal advice and is prepared by My Probate Legal Limited trading as My Probate Solicitors, a limited liability company registered in England and Wales under registration number 15337116. Registered office: Centurion House, 129 Deansgate, Manchester, M3 3WR. Authorised and regulated (under SRA number 8007072) by the Solicitors Regulation Authority.