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Save £100 when you purchase two funeral plans together. Call us for more details.
Something we all come to realise when we experience a close bereavement — especially if we are the ones who need to organise everything — is quite how much admin is involved. This can really take us by surprise and make things difficult when someone dies. Grief can derail our ability to think and to process even the most simple tasks. One task that emerges when we are the executor of someone’s will is the payment of inheritance tax due on their estate.
We wanted to put together this simple inheritance tax guide, giving you the basics of it for estate purposes. We will explain what it is; why it needs to be paid; who needs to pay it; and how it is calculated.
We would also just like to acknowledge straight away that, if you are reading this, we understand that you may have very recently been bereaved, or that you are facing that prospect imminently. We recognise the possible difficulty of the situation that you are in, and hope that our guidance proves useful to you.
In simple terms, inheritance tax is a form of tax which needs to be paid on someone’s estate when they die. The amount of tax due is proportional to the size of the estate. Preparing for this moment is a big part of end-of-life planning.
The government uses inheritance tax, quite simply, to help them pay for the services which they deliver for us, alongside other taxes, like income tax, corporation tax and value-added tax (VAT). By making certain things tax exempt (such as certain ISAs) or by offering tax breaks (such as with some pension payments), the government can also try to encourage financially responsible behaviour among the populace.
The disparity in inherited wealth across the UK from one family to the next is perhaps the greatest cause of one of our society’s biggest problems: wealth inequality. The two poles of our society — those whose families have wealth which they can pass down, and those whose don’t — are growing further and further apart. Indeed, the London School of Economics has found that, between 2011 and 2019, the wealth gap in the UK grew by 50%.
Inheritance tax is a lever the government can pull to try to rebalance things and minimise the impact of family-to-family wealth inequality on our economy as a whole. In fact, it has become a big focus of economists in recent times who are thinking about wealth inequality. Thomas Piketty’s 2013 book, Capital in the Twenty-First Century, whose release caused a bit of a stir, argued that the returns available through inherited wealth via investments and property far outstrip the returns we can get by working in the economy. He argues strongly for the use of inheritance tax as a way to definitively rebalance the inequalities of our age.
The only time when we are ever likely to think about inheritance tax is if we are the executor of someone’s will. In this case, once we have applied for probate, we will need to divide and disburse the estate, according to what is specified in the will, among its named beneficiaries. But before we do this, we will need to provide the government with a final account of all the assets in the estate, so that we can pay the correct tax on its value.
The executor of the will is responsible for paying any inheritance tax due on the value of someone’s estate when they die. This is one of the main reasons outlining the importance of writing a will: not only will you need to select an executor whom you trust to distribute your assets according to your wishes, but they will also need to be capable of meeting a legal responsibility.
According to the UK Government, there is not normally any inheritance tax to pay if the value of the estate is below £325,000; or, if it is, where the full amount above that £325,000 threshold is left by the person who has died to their spouse or civil partner, or to a charity or a community amateur sports club. The inheritance tax threshold can increase to £500,000 when the person who has died gives away their home to their children. However, there are certain conditions attached to this form of tax avoidance*.
In cases where inheritance tax does apply, the basic rate is 40%.
*Remember: ‘tax avoidance’ = making legal financial manoeuvres like this in order to lower the amount of tax you need to pay. ‘Tax evasion’ = when a person or a company illegally escapes paying taxes which they owe.
There are some key factors in calculation to consider, as well as some common deductions and allowances, impacting how inheritance tax is calculated.
One of the main jobs of an executor is to calculate the full value of the estate and give a final accounting of it to the government. In fact, it is one of the first things you will need to do: you will need to provide this figure whilst you are applying for probate, so it won’t even be possible to administer the estate without this information.
If you are an executor, you may even need to find lost or dormant assets in the name of the person who has died. For this reason, it is important beforehand to talk about death and dying with our loved ones — especially those who’ve made us an executor of their will — so that we can get a firm grasp of their financials before it is too late.
As noted, the basic inheritance tax rate for estates over the £325,000 threshold is 40%. The gross value of the estate is a simple calculation of all the combined assets in the name of the person who has died, at their current open market value. The net value of the estate is this total gross figure, before the application of any inheritance tax exemptions, and minus any liabilities, like certain unpaid debts, or tax-deductible expenses (such as, in some cases, funeral expenses). Once you have worked out all of this, you will be able to understand whether any inheritance tax needs to be paid on the final value of the estate. In all likelihood, it will not, as, according to HMRC, between 2021 and 2022, only 4.39% of British deaths resulted in inheritance tax payments.
There are a variety of common deductions and allowances that we can benefit from regarding inheritance tax. For instance, if property is passed to a surviving spouse in accordance with a will, then all inherited property — even above the usual £350,000 threshold — is exempt from inheritance tax.
It’s also possible to increase the typical inheritance threshold to £500,000, if a house has been left for children or grandchildren in a will. Similarly, we can make one-off gifts to family members whilst we are still alive to this effect, although sometimes inheritance tax is due to be paid on gifts after the death of the donor. When inheriting cash or financial assets such as stocks and shares, we may not necessarily need to pay any inheritance tax on the cash or assets themselves at the time of receipt. But depending on certain circumstances (such as whether the person who has died gave us a gift within the seven years before their death), we may accrue tax to be paid.
There are various ways in which you can legally minimise the inheritance tax burden on your estate, to be paid by the executor of your will.
You can use your will to help reduce the tax burden on your estate. For instance, if your estate is worth enough to push it above the taxable threshold of £325,000 (or £500,000 if bequeathing your house to your children or grandchildren), then you may be able to reduce the tax rate by 4% (to 36%) if you leave at least 10% of the taxable value of your estate to a charitable cause.
Lifetime gifts are another way in which someone could proactively reduce the value of their estate when it comes time to pay inheritance tax. It could be cash or property such as a house. For instance, if someone foresees that their estate will be above the taxable threshold when they die, they may try to avoid this by gifting some of their assets away ahead of time. It’s important to bear in mind that, when providing a final account to HMRC of the estate’s value, the executor will need to establish whether any lifetime gifts have been given by the person who has died; these gifts may retroactively be subject to inheritance tax, payable by the recipient.
You may also decide to set up a trust in order to reduce the tax burden of your estate. Strictly speaking, putting certain property or assets into a trust means that they no longer belong to you. Hence, they are no longer part of ‘your assets’ when it comes to tallying the final estate value. Instead, they belong to the trust, and when certain conditions are met (for instance, you may wish to add an age condition to the trust to prevent younger children from accessing property before they may be fully responsible with it), the property will pass to the ultimate beneficiaries.
Naturally, estate management is quite a bewildering experience for people who don’t normally need to deal with such things. For instance, only some gifts from, e.g., a parent to a child, are potentially applicable to inheritance tax. There are also various kinds of trusts out there, some of which are more costly to establish and administer than others. Therefore, as with other types of financial planning and decision making, it may be a good idea to seek proper financial advice before making any decisions or declarations.
As with any other consumer related decision, you should seek your inheritance tax specialist through a combination of recommendations from people you trust, to consumer comparison research of pricing and customer satisfaction. Any legal services have the potential to be expensive, so you will need to be sure that your money is being spent as well as possible. Try to head off the need for as much legal advice as possible by discussing the workings of the estate with the person who wants you to be their executor as far enough in advance as possible.
There are situations in which additional tax may apply to inherited property. Make sure to avoid double-taxation where relevant.
If you are inheriting assets from an international estate, depending on where it is based, there may be more than one set of taxes to be paid upon its value. In general, though, you will only pay inheritance tax to HMRC on British assets. Furthermore, if the UK government and a foreign government have charged you inheritance tax on the same asset, you may be able to reclaim what you’ve erroneously paid, or legally avoid paying, through double taxation relief.
In situations where a gift has been made (usually within 7 years of the testator’s death), inheritance tax may have been paid on the value of the estate when it was executed, and more may be due from the beneficiary of the gift. In this situation, HMRC will normally contact the recipient of the gift, assuming it has been properly declared in the final account given by the executor. Therefore, if the testator intends to use gifting as a way of lessening the inheritance tax on their estate, it will need to be done properly, or their family could still end up paying more.
As always, if you have any specific questions about cross-border inheritance tax, or the use of double-taxation treaties, it may be worth consulting an expert in the matter. It can be hard enough to understand domestic inheritance tax requirements, without having to worry about the rules of a foreign regime.
Here are some common questions that people tend to have about inheritance tax.
Inheritance tax applies when someone leaves behind an estate whose value crosses a certain threshold (£350,000–500,000). The payment needs to be made within 6 months of their death. Some gifts, such as cash gifts given for specific reasons (like a present for a wedding) are exempt from inheritance tax, if they are within a certain amount.
If you don’t pay your inheritance tax bill within six months, then interest will begin to accrue on top of what you already owe. For this reason, it is wise to pay it as quickly as you are able. If your bill is too large for you to pay in one go, you can pay in instalments.
If you want to appeal a decision about how much inheritance tax you owe, you normally have 30 days to do so. You will need to either write a letter outlining your reasons, or use the appeals form you will have received along with your tax decision letter confirming what you owe.
It depends on how much was given, and how soon before death the gifts were given. When someone dies, the executor will need to record lifetime gifts in their final accounting, providing an accurate estimation of their material worth. Gifts made at least seven years before the death of the testator are normally exempt from inheritance tax, regardless of the value of the gift (referred to as Potentially Exempt Transfers (PETs)). This is as long as the recipient didn’t continue to benefit from it (e.g., financial assets which generate passive income). Gifts made within this seven-year period could potentially be subject to inheritance tax for the beneficiary of the gift.
We hope you have enjoyed our brief inheritance tax guide. As always, it is a pretty complicated subject which can feel overwhelming, and there are consequences attached to planning it poorly. It could be a good idea to seek real, professional advice on the matter, if you have more specific questions.
Thinking about our estates is a big part of end-of-life planning, alongside funeral preplanning. Aura are industry leading experts in funeral planning, and we offer our prepaid funeral plans to families in the UK looking for future peace of mind for themselves and their loved ones. We have the highest Trustpilot rating of any national ‘Cremation Services’ provider in the UK, with 4.9/5 stars.
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