Inheritance Tax
Probate & Estate Planning
Inheritance Tax is a tax that is paid on a person’s net estate when they die. To work out your net estate, you add up all of your assets (your home, your money and your belongings) and take away any debts. The end number is your net estate.
| Jamal dies on the 2nd February 2024. On his death, Jamal owns a house valued at £250,000 and a car worth £10,000. Jamal has £100,000 in his bank accounts. He has a credit card debt of £2,000 and owes £500 to the Council for his Council Tax. To work out his net estate for tax, he must: Step 1: Add together assets – 250,000 + 10,000 + 100,000 = 360,000 Step 2: Add together debts - 2,000 + 500 = 2,500 Step 3: Take away step 2 answer from step 1 – 360,000 – 2,500 = 357,500. Net Estate = £357,500 |
In some instances, inheritance tax is also paid during the lifetime of a person, but this is quite rare.
It is possible to plan your finances during your lifetime to try and mitigate an inheritance tax bill on your death. This is often done with the help of a financial advisor and your solicitor.
Working out the correct amount of Inheritance Tax due can be very complicated. It is always best to seek the advice of a professional to be sure on the amount of tax, as to under pay can mean that you have to pay interest on the tax due and possibly a fine to HMRC.
RATE OF TAX
- Every person has an allowance of £325,000. This is called the “Nil Rate Band”.
- If your net estate is less than the Nil Rate Band at death, you pay no Inheritance Tax.
- If your net estate is more than the Nil Rate Band at death, you pay 40% Inheritance Tax on the amount above your Nil Rate Band.
- If 10% or more of the money is left to charity, you pay 36% Inheritance Tax instead of 40%.
INCREASING YOUR NIL RATE BAND
- If you have a spouse, or civil partner, and they die before you, you can use their Nil Rate Band on top of yours.
- If you own a house and leave the house to your children, there is an extra Nil Rate Band, called the Residence Nil Rate Band. The Residence Nil Rate Band is an additional £175,000.
- You can also add your spouse or civil partner’s Residence Nil Rate Band to yours if they die before you. This means the maximum is £350,000.
- If you qualify for all of these, the maximum tax-free net estate can be £1 million.
GIFTS AND TRUSTS
- Some gifts will need to be added to the final calculation when adding up the estate. This is a very complex area, so it is best to get professional advice from your solicitor, financial advisor or specialist accountant about what needs to be included.
- Some trusts will also need to be added to the final calculation. Again, it is best to seek professional advice on this.
EXEMPTIONS AND RELIEFS
- Some assets are not added to the calculation because they do not count towards inheritance tax. An example would be some (but not all) pensions.
- Some assets attract inheritance tax exemption, which means they are added to the calculation, but they can be taken off again, either partially or in full. An example would be some (but not all) businesses.
- Some people / organisations are classed as exempt. This means that if you leave money to them, this amount will not be taxed at all. These people are your spouse or civil partner, or a charity.
PAYING THE BILL
- It is usually the estate who must pay the Inheritance Tax bill. They can ask the banks to do this directly, so the beneficiaries don’t usually pay this themselves.
- You can pay in installments.
- You need to pay Inheritance Tax before a Grant of Representation (e.g. a Grant of Probate) can be given to the personal representatives (e.g. the exectors).
CHANGES TO INHERITANCE TAX
- This area of law is almost always under review and therefore it is important to check your estate planning is recent and up to date.
- Whilst governments talk about abolishing Inheritance Tax, be mindful that it has existed for many years, just under different names (such as Estate Duty).
- Inheritance Tax income was £3.881 billion in the first half of 2024 alone.
