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Wills & Probate / Inheritance Tax
What is Inheritance Tax?
Inheritance Tax is usually paid on an estate when somebody dies. Most
estates don't have to pay Inheritance Tax because they're valued at less
than the threshold (£325,000 in 2013-14). The tax is payable at 40% on the
amount over this threshold or 36 per cent if the estate qualifies for a reduced
rate as a result of a charitable donation.
Increased threshold for married couples and civil partners
Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2013-14. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die.
Who is responsible for paying Inheritance Tax?
Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceased's estate.
The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax - but this is not common.
Valuing an estate to see if Inheritance Tax is due
To find out if Inheritance Tax is due on an estate, you must first value the estate. This means adding up the value of all the assets in the estate - such as a house, possessions, money and investments - and deducting any debts the deceased may have owed, including household bills and funeral expenses.
An estate also includes the deceased's share of any jointly owned assets and the value of any assets held in trust.
You should also review any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren't exempt, include them in the overall value of the estate.
Deadline for paying Inheritance Tax
In most cases, you must pay Inheritance Tax within six months of the end of the month in which the deceased died. After this, interest will be charged on the amount outstanding. You can pay in yearly instalments over ten years if the value of the estate is tied up in property such as a house. The due dates are different if you're paying Inheritance Tax on a trust.
Inheritance Tax and probate forms
You have to fill out an Inheritance Tax form as part of the probate process (or confirmation in Scotland) even if no Inheritance Tax is due. Different forms are used depending on where the deceased lived, and whether there is any Inheritance Tax to pay. You must pay some or all of any Inheritance Tax due before you can get a grant of probate (or confirmation).
Fairbrother & Darlow can advise on all the issues surrounding Inheritance Tax, based on your own specific circumstances.