This is one of a number of explanatory articles, part of a set copied under licence from H M Revenue & Customs website:
Introduction – Is Inheritance Tax due?
Calculating Inheritance Tax
Valuing assets
Responsibilities of personal representatives
Business relief and businesses
Discretionary trusts
Deceased left no will
Pensions
Agricultural relief
Deceased's liabilities
Foreign aspects
Joint property
Penalties
Settled property
Woodlands
Probate
Alter Inheritance tax
Gifts
Excepted estates
Paying IHT
Thresholds and Interest
Introduction
This guide is designed to help our customers to obtain a grant of representation, complete an account of the deceased's estate, and pay any inheritance tax (IHT) which may be due.
It also gives advice about lifetime gifts and the taxation of discretionary trusts.
The proposals in the Finance Bill 2006 affect the meaning in this article regarding:
- gifts into certain kinds of trusts
- the tax treatment of trusts, known as interest in possession trusts, in which the beneficiaries have a right to benefits
- the ending of an interest in possession during a beneficiary's lifetime
- the treatment of funds in alternatively secured pensions on death.
This article will be updated as necessary when the Finance Bill is enacted.
Is Inheritance Tax due?
Inheritance Tax (IHT) is only due if the value of the estate is above the IHT threshold.
You must add most gifts made in the seven years before death to the person's estate to calculate the IHT due, but some will be exempt and these exempt gifts do not need to be included.
You can also leave out any exempt gifts left by way of a will or intestacy.
Can I deduct anything from the estate?
You can deduct certain reliefs from the value of some types of property such as farms, businesses and unquoted shares.
You can also deduct bills outstanding at the date of death and the funeral expenses to arrive at the net value of the estate.
Who pays the IHT due on an estate?
The personal representatives are liable to pay any IHT due on an estate.
Are there any charges if the IHT is paid late?
Interest is charged on any tax not paid by the due date, no matter what caused the delay in payment.
Example
Mr Jones died on 10 April 2005 leaving £1,000 to a UK registered charity and the rest of his estate to his daughter. The threshold for inheritance tax at the time was £275,000 and the rate of IHT is 40%
Assets Value
- House = £230,000
- Car = £7,500
- Household Goods = £2,000
- Bank account = £19,250
- Shares = £30,075
- Premium Bonds = £500
Total value = £289,325
Allowable deductions
- Telephone bill = £55
- Electricity bill = £45
- Gas bill = £35
- Funeral expenses = £950
Total deductions = £1,085
Less charity exemption = £1,000
Net value of Mr Jones's estate = £287,240
Inheritance Tax is payable because the net value of the estate is above the threshold of £275,000. Tax is charged at 40%.
- Net value of assets = £287,240
- less threshold = £275,000
- Total liable to inheritance tax = £12,240
Inheritance Tax (£12,240x40%) = £4,896
If inheritance tax is due on an estate, and you need to fill in a full account, you can download the forms and notes from HM Revenue and Customs website.
If you think that inheritance tax is not due on an estate, the following guidance will help you to decide if the estate is an excepted estate.
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