Inheritance tax is a tax applied to the estate of someone who has died. This includes all assets, property, and funds. For 2020/21, the inheritance tax threshold is £325,000, which means that an estate worth over £325,000 is liable to an inheritance tax rate of 40%.
If your loved one left a will with a named executor, that executor is responsible for paying the inheritance tax on the estate. If they did not leave a will, an administrator can be named by the courts, and they will be responsible.
When you know how much inheritance tax is owed, you can pay using money from the estate, or money earned from the sale of assets within the estate. Alternatively, you can pay through the Direct Payment Scheme, through which inheritance tax will be taken directly from the deceased’s bank account.
Inheritance tax should be paid before six months have passed since your loved one’s death. If it is left any longer, HMRC will charge you interest and late payment penalties up to £3000.
There are several ways to get out of paying some or all inheritance tax if your estate is worth over £325,000.
First, the inheritance tax threshold does not apply between spouses and civil partners who live together. Therefore, if your loved one left their estate to their spouse or civil partner, no inheritance tax will be owed on the estate, even if it above the £325,000 allowance. On top of this, they will inherit the deceased’s unused inheritance tax allowance, meaning that the inheritance tax threshold on that estate will be doubled to £650,000.
Alternatively, if your loved one left property to their children, stepchildren, or grandchildren, an extra £175,000 will be added to their inheritance tax allowance. This means that their inheritance tax allowance for the year 2020/21 will be increased to £500,000.
Finally, a way to pay less inheritance tax is to leave 10% of the estate to charity. If you leave 10% of your estate to charity, the inheritance tax rate will be lowered to 36% from 40%. Of course, this means you will lose 46% of the estate in total, but if you are considering leaving money to charity in your will anyway, it is a good idea to leave 10% so that your inheritance tax rate is reduced.
In England, Wales, and Scotland, an inheritance tax form known as IHT400 needs to be filled out and submitted to the government. IHT400 helps you and HMRC to figure out how much inheritance tax is due on the estate that you are dealing with. If you are unfamiliar with financial and legal jargon, you may find filling out this form particularly complex and time-consuming. Therefore, it is a good idea to hire a professional probate service such as Kwil to complete the form for you.