If someone leaves a net estate worth more than £325,000, then Inheritance Tax will need to be calculated and paid.
This is not always a straightforward process and the estate executor or administrator will need to carry out investigations and arrange for professional valuations of any assets worth £1,500 or more.
Valuing an estate for Inheritance Tax purposes
One of the first tasks is to identify all of the assets within the estate. This may include a property as well as savings, life insurance policies, pensions, shares and valuable items. Professional valuations should be obtained, to include valuation of any property the deceased held, which should be carried out by an RICS surveyor.
The executor or administrator will also need to look at any gifts that the deceased made within the last seven years of their life, as these may attract Inheritance Tax. While it is permitted to give away up to £3,000 per year as well as individual gifts of £250, larger gifts will have to be included in the Inheritance Tax calculation. The amount of Inheritance Tax payable on gifts depends on the date on which they were made, with tax due on a sliding scale as follows:
Years between gift and death Rate of tax on the gift
3 to 4 years 32%
4 to 5 years 24%
5 to 6 years 16%
6 to 7 years 8%
7 or more 0%
Debts and expenses
The estate’s debts and expenses such as funeral costs and the
cost of valuations, winding up the estate and estate agent’s fees can be deducted from the gross amount of the estate’s assets, giving a net figure.
Calculating Inheritance Tax
Inheritance Tax is payable on the part of a net estate that is above the threshold of £325,000. It is generally charged at 40%, although if you leave 10% or more of your net estate to charity, the rate is reduced to 36%.
If the deceased was married, they can leave all of their estate to their spouse free of Inheritance Tax. When their spouse dies, the executor can utilise the unused allowance of the first to die of £325,000, meaning the estate of the second to die could potentially have an allowance of £650,000. In this event, Inheritance Tax is only payable on the part of the estate above £650,000. There is a further allowance of £175,000 if the deceased leaves a property to their direct descendants, ie. children, grandchildren etc. This can also be passed to a spouse if it has not been used, meaning a couple could potentially leave an estate of up to £1 million without needing to pay Inheritance Tax.
Paying Inheritance Tax
Inheritance Tax should be paid within six months of the end of the month in which the deceased died. Money may have to be released from bank accounts and savings to do this, or it could potentially be paid in instalments over ten years, along with interest. Inheritance Tax calculations can be complex and it is generally advisable to seek legal help to ensure the liability is fully discharged.