Paying Inheritance Tax: Deadlines, Rates, and Rules

For those dealing with someone’s estate after their death, the Inheritance Tax bill can come as a nasty shock. Paying Inheritance Tax is something that needs to be done before a Grant of Probate or Letters of Administration are applied for. In some circumstances this can create difficulties.

The current Inheritance Tax threshold is £325,000. Estate’s valuing more than this amount will be subject to Inheritance Tax.

Inheritance tax is paid on the amount in excess of the threshold at the rate of 40%. There are however some exceptions to this. For example, where an individual leaves everything to their spouse or civil partner, no Inheritance Tax is payable. When the spouse or civil partner dies, their estate can also benefit from any unused Inheritance Tax allowance from the estate of the first to die.

How to calculate Inheritance Tax

Calculating Inheritance Tax (IHT) can be complicated, but you can break the process down into clear steps.

First, the estate’s personal representative must value everything the deceased person owned. Crucially, they also need to look back seven years to identify any valuable gifts given during the deceased’s lifetime. If the estate owes tax, some of these cash gifts or assets will face a tax bill on a sliding scale. Fortunately, you can find the exact percentage rates directly on the government’s website.

When you value the estate, you must include all items of value. For example, you need to list property, cars, jewelry, art, shares, Premium Bonds, and investments. Consequently, you must record the exact value of these items on the date of death using the official HM Revenue & Customs (HMRC) forms. To get accurate figures, you can hire a professional to value specialised items like art or jewellery. On the other hand, you can estimate the value of houses or cars by looking at recent sale prices for similar items.

Fortunately, tax allowances can significantly reduce the final bill. When someone passes away, you can combine their personal tax allowance with any unused allowance from their late spouse or civil partner.

In addition to the standard allowance, there is a specific main residence allowance worth £175,000. This extra tax relief applies if the deceased leaves their home to direct descendants, such as children or grandchildren. Furthermore, if a late spouse or civil partner did not use this property allowance, you can transfer it to the current estate to lower the tax bill even further.

Where the deceased left 10% or more of their estate to charity, their Inheritance Tax rate will drop to 36%.

How and when to pay inheritance tax

Inheritance Tax should be paid at least fifteen working days before an application for a Grant is made to the Probate Registry. Before Inheritance Tax can be paid, you need to ask HMRC for an Inheritance Tax reference number. It will take them up to three weeks to issue this.

Once the reference number has been received, it can be used to pay the Inheritance Tax. A number of forms will also need to be sent to HMRC at the same time, giving full details of the deceased’s estate.

There is a deadline for payment of Inheritance Tax of the end of the sixth month after the person died. If this is not met, then HMRC will charge interest.

How to fund an Inheritance Tax payment

Most people do not have enough cash to cover an Inheritance Tax bill.

This situation causes difficulties because investment companies rarely release funds early. Generally, they require a Grant of Probate or Letters of Administration first. However, the probate registry will not issue the Grant until you pay the Inheritance Tax.

Fortunately, you have a few ways to solve this problem.

First, look at the deceased’s bank or building society accounts. You can ask these financial institutions to pay HMRC directly from those accounts. Additionally, you can use British government stock to pay the tax bill.

Alternatively, you can choose to pay the tax in equal annual installments over ten years. However, this option only applies to assets that take time to sell, like property or shares. Keep in mind that HMRC generally charges interest on the outstanding balance. Furthermore, you must clear the full tax bill immediately once you sell the assets.

You can also use this instalment method if you keep the house to live in it yourself.

 

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