Inheritance Tax Guide

Inheritance Tax (IHT) is a tax on the estate of someone who has died. This guide explains how inheritance tax works, when it applies, and how to handle it during probate.

Understanding Inheritance Tax

Inheritance Tax is paid on the value of the deceased's estate above a certain threshold. The standard Inheritance Tax rate is 40% on the portion of the estate that exceeds the threshold.

Current Thresholds

As of 2024, the key thresholds are:

• Nil Rate Band (NRB): £325,000

  • This is the basic tax-free threshold for everyone

• Residence Nil Rate Band (RNRB): Up to £175,000

  • Additional allowance when a home is passed to direct descendants
  • Tapers down for estates worth more than £2 million

• Transferable Allowances:

  • Unused NRB and RNRB can be transferred to a surviving spouse or civil partner
  • This can potentially double the tax-free threshold to £1 million for a couple

Calculating the Estate Value

To determine if inheritance tax is due, you must calculate the total value of the estate:

Assets to Include

• Property and land
• Money in bank accounts
• Investments and shares
• Business assets
• Vehicles
• Jewelry and other valuables
• Payouts from life insurance policies not written in trust

Deductions Allowed

• Debts and liabilities
• Funeral expenses
• Professional fees related to administering the estate
• Charitable donations

Exemptions and Reliefs

Several exemptions and reliefs can reduce or eliminate inheritance tax:

Spouse or Civil Partner Exemption

• Assets passed to a spouse or civil partner are exempt from inheritance tax

Charity Exemption

• Assets left to qualifying charities are exempt from inheritance tax
• Leaving 10% or more of your estate to charity can reduce the IHT rate from 40% to 36%

Business Relief

• Business Property Relief can provide 50% or 100% relief on business assets
• Applies to certain business interests, including some unlisted shares

Agricultural Relief

• Agricultural Property Relief can provide 50% or 100% relief on farming assets
• Applies to farmland and buildings under certain conditions

Paying Inheritance Tax

When to Pay

• Inheritance tax must typically be paid within six months of the death
• Payment is required before probate can be granted

How to Pay

• Direct payment from the deceased's bank accounts (if the bank allows)
• Personal payment by executors (to be reimbursed from the estate)
• Installment options for certain assets like property

Forms and Reporting

IHT400 Series

• Required for estates above the threshold or complex estates
• Comprehensive forms detailing all assets and liabilities

IHT205

• Simplified form for smaller estates below the threshold
• Less detailed than the IHT400 series

Planning Ahead

While this guide focuses on handling inheritance tax during probate, there are legitimate ways to plan ahead:

• Making lifetime gifts (potentially exempt transfers)
• Setting up trusts
• Writing life insurance policies in trust
• Making use of annual gift allowances

Common Mistakes to Avoid

• Undervaluing assets (HMRC can challenge valuations)
• Missing deadlines for payment and filing
• Overlooking available exemptions and reliefs
• Distributing assets before paying inheritance tax

How Clear Executor Can Help

Our platform can:

• Help calculate potential inheritance tax liability
• Guide you through completing the necessary forms
• Identify applicable exemptions and reliefs
• Connect you with tax specialists for complex cases

Remember that inheritance tax rules can change, and this guide provides general information. For specific advice tailored to your situation, consider consulting a tax professional or using Clear Executor's assessment tool.