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Inheritance Tax

A tax on the estate of a deceased person, including property, money, and possessions, above a certain threshold.

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Comprehensive Guide to Inheritance Tax (IHT) in the United Kingdom

Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has passed away. In the UK, this tax is governed by national regulations and applies uniformly across England, Scotland, Wales, and Northern Ireland. Below is a detailed guide to help you understand the key aspects of IHT, including regulations, costs, procedures, and specific considerations.

1. National Regulations

1.1. Tax-Free Threshold (Nil-Rate Band)

  • The standard Inheritance Tax threshold is £325,000. This is known as the nil-rate band.
  • If the total value of the estate is below this threshold, no IHT is payable.
  • If the estate exceeds this threshold, IHT is charged on the amount above £325,000.

1.2. Tax Rate

  • The standard IHT rate is 40% on the portion of the estate above the £325,000 threshold.
  • A reduced rate of 36% applies if at least 10% of the estate is left to charity.

1.3. Additional Allowances

  • Residence Nil-Rate Band (RNRB):
    • An additional allowance of up to £175,000 is available if the deceased leaves their home (or proceeds from its sale) to direct descendants (e.g., children or grandchildren).
    • This allowance is tapered for estates worth more than £2 million, reducing by £1 for every £2 over this threshold.
  • Spouse or Civil Partner Exemption:
    • Transfers between spouses or civil partners are exempt from IHT, regardless of the amount.
    • If the deceased did not use their full nil-rate band or RNRB, the unused portion can be transferred to the surviving spouse or civil partner, effectively doubling the thresholds.

1.4. Gifts and Exemptions

  • Gifts made more than 7 years before death are generally exempt from IHT.
  • Gifts made within 7 years of death may be subject to IHT, but the tax rate is reduced on a sliding scale (known as taper relief) for gifts made between 3 and 7 years before death.
  • Certain gifts are exempt, including:
    • Annual gifts of up to £3,000.
    • Small gifts of up to £250 per person.
    • Wedding or civil partnership gifts (up to £5,000 for children, £2,500 for grandchildren, and £1,000 for others).
    • Gifts to charities or political parties.

2. General Costs

2.1. IHT Liability

  • The primary cost is the IHT itself, calculated at 40% of the taxable portion of the estate.
  • Example: If an estate is worth £500,000, the taxable portion is £175,000 (£500,000 - £325,000). The IHT liability would be £70,000 (40% of £175,000).

2.2. Professional Fees

  • Executors or administrators may incur costs for professional services, such as:
    • Probate application fees: £273 in England and Wales (as of 2023) for estates over £5,000. No fee applies for smaller estates.
    • Solicitor or probate specialist fees: Typically range from £1,000 to £10,000, depending on the complexity of the estate.
    • Valuation fees: Costs for valuing property, shares, or other assets vary but can range from £200 to £1,000+ per asset.

2.3. Other Costs

  • Property clearance, maintenance, or sale costs.
  • Tax on income generated by the estate during the administration period.

3. Standard Procedures

3.1. Valuing the Estate

  • Executors must calculate the total value of the deceased’s estate, including:
    • Property, savings, investments, and personal possessions.
    • Any gifts made within 7 years of death.
    • Outstanding debts and funeral expenses, which can be deducted from the estate’s value.

3.2. Reporting to HMRC

  • If the estate is above the IHT threshold, the executor must complete and submit an Inheritance Tax account (Form IHT400) to HM Revenue & Customs (HMRC).
  • For estates below the threshold, a simpler form (IHT205) may be used in England, Wales, and Northern Ireland. Scotland has its own process under the Confirmation system.

3.3. Paying IHT

  • IHT must be paid by the end of the sixth month after the person’s death. For example, if someone dies in January, IHT is due by the end of July.
  • Executors can pay IHT in instalments over 10 years for certain assets, such as property, but interest will be charged on the outstanding balance.

3.4. Applying for Probate

  • Probate is the legal process of administering the estate. Executors must apply for a Grant of Probate (or Confirmation in Scotland) to access and distribute the deceased’s assets.
  • Probate cannot be granted until any IHT due has been paid.

3.5. Distributing the Estate

  • Once probate is granted, the executor can distribute the estate according to the will or intestacy rules (if there is no will).

4. Specific Considerations

4.1. Planning to Reduce IHT

  • Lifetime Gifts: Making gifts during your lifetime can reduce the value of your estate, but you must survive for 7 years for the gifts to be fully exempt.
  • Trusts: Placing assets in a trust can help reduce IHT liability, but this is a complex area requiring professional advice.
  • Charitable Donations: Leaving at least 10% of your estate to charity reduces the IHT rate to 36%.
  • Pensions: Pension funds are generally exempt from IHT if left to beneficiaries.

4.2. International Considerations

  • If the deceased owned assets abroad, these may also be subject to IHT in the UK, depending on their domicile status.
  • Double taxation treaties may apply to avoid being taxed twice on the same assets.

4.3. Agricultural and Business Relief

  • Certain assets, such as farms or business interests, may qualify for Agricultural Relief or Business Relief, which can reduce the taxable value of the estate by up to 100%.

4.4. Scottish Variations

  • While IHT rules are the same across the UK, Scotland has a separate legal system for probate, known as Confirmation. Executors must apply to the Sheriff Court for Confirmation.

5. Key Takeaways

  • The standard IHT threshold is £325,000, with a 40% tax rate on the excess.
  • Additional allowances, such as the Residence Nil-Rate Band, can increase the tax-free threshold.
  • Executors are responsible for valuing the estate, reporting to HMRC, paying IHT, and applying for probate.
  • Planning ahead, such as making lifetime gifts or using trusts, can help reduce IHT liability.
  • Professional advice is highly recommended for complex estates or international considerations.

By understanding these regulations and procedures, you can better navigate the complexities of Inheritance Tax in the UK.