When is Inheritance Tax (IHT) payable?

Fewer than five per cent of deaths in the UK result in a charge for inheritance tax, but if you are an executor, it is still important that you correctly value the assets of the deceased person and identify the tax position correctly.

Whether any inheritance tax is payable will depend on the value of the estate, the types of assets held, the availability of tax reliefs and the beneficiaries to whom estate funds are payable

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    Exempt estates and beneficiaries

    An ‘exempt’ estate is one where no inheritance tax is payable due to the nature of the beneficiaries. Either all beneficiaries are exempt, or only some are but the value of the assets passing to those who are not exempt is within the deceased’s tax-free allowances.

    There are two types of exempt beneficiaries, spouses or civil partners, and charities. No matter the value of assets passing to a deceased’s spouse or civil partner, or to a registered charity, they need pay no tax on those assets.


    FAQs and helpful info

    All estates require the completion of a relevant tax form for HMRC, and this will either be an IHT205 or an IHT400.

    An IHT205 return of estate information is required where no tax is payable. You must still report the full value of the estate to HMRC, even though the estate does not have to pay any tax. As there is no inheritance tax to pay, the reporting required under the IHT205 is relatively straight forward and the form is reasonably short.

    An IHT400 inheritance tax account is required in all cases where tax is due, as well as in some cases where tax is not due. For example, if the estate value is greater than £1million but tax is not payable due to the spousal or charitable exemption, an IHT400 will still be required. The IHT400 requires much more thorough reporting of the estate assets and liabilities than the IHT205.

    As an executor, it is your responsibility not only to accurately determine which form is appropriate but also to ensure that it is completed correctly. If you are uncertain which form you should use, or how to complete this, our solicitors can help.

    Tax law is an especially complex legal field and one which presents many common pitfalls when not navigated appropriately.

    As executor, it is your responsibility to ensure that all assets are accurately valued and reported to HMRC. A report may be inaccurate due to not having obtained up-to-date valuations or having overlooked an estate asset. If further assets come to light at a later time, you must notify HMRC, and this may require you to submit a corrective account. If you distribute estate assets having failed to accurately account to HMRC, you could be personally liable for any additional tax liability arising, as well as any interest and fees arising on the additional tax.

    Conversely, it is common for executors to overpay IHT. This can occur when asset values are overestimated or where an executor has failed to take into account the availability of tax-free allowances, IHT reliefs, or the exemption status of certain beneficiaries. If tax is overpaid, beneficiaries will receive less than they should and, again, you could find yourself becoming personally liable for the shortfall.

    Our solicitors are knowledgeable about and experienced in IHT rules and we can help ensure that tax is correctly paid, without risking an underpayment or overpayment to HMRC.

    It is particularly advisable to instruct a solicitor where the deceased person owned a private residential property in which they lived prior to death, as the estate may qualify for the residence nil-rate band. It is not always easy to determine whether this allowance applies, as it depends upon both the status of the property ownership and to whom the property passes.

    You should also consider instructing a solicitor if the deceased person held any agricultural or business property, as these may be eligible for additional reliefs.

    Even without either of these factors, it is advisable to check the inheritance tax position with a professional, and our solicitors would be happy to help you decipher the applicable tax laws

    Excepted estates

    No inheritance tax will be payable if the estate is ‘excepted’ and there are three situations in which this occurs:

    1. First, where the estate is exempt as detailed above;
    2. Second, any estate with a total value that is less than the deceased person’s available tax-free allowances, so this will hinge on the value of assets rather than the particular beneficiaries. This condition will differ with each estate depending upon the amount of unused nil-rate band available, any transferable nil-rate band and whether the estate also qualifies for the residence nil-rate band.
    3. Finally, if the deceased lived abroad permanently and their UK assets are worth less than £150,000.


    How can we help?

    If you are the executor of an estate and you are at all concerned about inheritance tax, we would be pleased to assist you, whether with one off advice or dealing with the probate process on your behalf.

    Inheritance Tax (IHT) Calculator


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