Inheritance Tax Defined

What is inheritance tax?

Inheritance tax doesn't do what it says on the can. It sounds as though it's a tax on inheritances that a person receives. It's completely the other way around. Inheritance tax is a tax on the value of a person's estate when they die, subject to some very complicated rules. It may also apply to gifts made by a person during their lifetime. But, it's not a tax on inheritances that you receive.

Why might I have to pay inheritance tax?

There are two fairly common sets of circumstances in which inheritance tax is payable. The most common is when a person dies. And they leave an estate behind them valued at current figures, at three hundred thousand pounds or more. You might also have to pay inheritance tax if you've made a gift during your lifetime, and you survive for less than seven years after the gift was made. Trusts also have to pay inheritance tax in some circumstances.

How is inheritance tax calculated?

Inheritance tax is calculated in two ways. On death the value of the estate is totaled up, liabilities are taken off, certain non-taxable assests are excluded, and inheritance tax is then levied on the balance, and the tax rate is 40%.

What is the inheritance tax threshold?

The inheritance tax threshold is the amount below which inheritance tax isn't payable on death. The figure currently is 300 thousand pounds. So, if a person died within a state of less than 300 thousand pounds, there would be no inheritance tax to pay. Above 300 thousand pounds, the amount of the tax would have to be calculated by the executors and the tax paid over to a Chamber of Revenue and Customs.

Who pays out inheritance tax?

When we're dealing with a deceased estate, inheritance tax is payable by the executor or the person to whom authority has been granted. That has to be paid generally, before probate can be granted and the estate administered in full. There are instalment payments available in respect to some classes of assets.

What is a 'personal representative', and how are they chosen?

The personal representative will generally be the person identified in the will of the deceased person, as being trusted as the executor in the person who will administer the estate after the individual has died. Their authority to administer the estate is recognized in England and Wales by the Ground of Representation from the Probate Service. In Scotland, from the Ground of Confirmation by the Sheriff Clark and in Northern Ireland by the World Courts of Justice.

What is a grant of representation?

A grant of representation is the document where by official authority is given to an individual to administer the estate of the deceased person. In England and Wales that grant is made by the Probate Service, in Northern Ireland by the Royal Courts of Justice, and in Scotland, it's called something slightly different, it's called Confirmation, and it's granted by the Sheriff Clerk.

Is there a deadline for paying inheritance tax?

Inheritance tax has to be paid before the administration of the estate can really begin. If you have certain classes of assets in the estate which qualify for instalment payments, those instalments can be spread over a period. In the case of property, that period ends with the sale of the property itself.

What is an 'administration period', and how long does it last?

The administration is the period of time during which the estate of a deceased person is being administered. It doesn't have a set length. The process takes as long as the circumstances require. In practical terms, most executors take the view that the administration has ended once they have had final confirmation from HM Revenue and Customs that all the inheritance tax liabilities have been settled. Then need to then quickly wrap up any income tax or capital gains matters that may have arisen during the period of administration before they make final distributions to the beneficiaries of the estate.

What is the 'nil-rate' band?

The nil-rate band is the current rate of £300 000, which on death no inheritance tax is payable. It's a very valuable concept because it means that transfers within the nil-rate band can be made on death or during the lifetime with no worry that inheritance tax will be payable. Often, one sees in wills a provision which creates a trust up to the value of the nil-rate band out of assets within the estate, which can be effectively taken outside the estate and used for the benefit of the beneficiaries. Only the excess will then be within the taxable estate. If the taxable estate is left to the surviving spouse, then no inheritance tax will be payable on the first death within a couple, but only on the second death.