Inheritance TaxFrequently Asked Questions
Inheritance Tax is a tax on the property, money, investments and possessions (also known as the estate) of someone who has died.
Each person has a tax-free allowance also known as a nil rate band on their estate. This means that your estate won’t incur Inheritance Tax if it is under a certain amount. The tax-free allowance for the 2016-17 tax year is £325,000.
Married couples and civil partners can pass their estate to the surviving spouse or civil partner tax-free when they die. In other words, the surviving spouse or civil partner can inherit the entire estate without having to pay Inheritance Tax. They can also pass on their unused tax-free allowance to their spouse or civil partner and they can add it to their own tax-free allowance. This is often referred to as the unused transferable nil rate band.
This means the surviving spouse or civil partner could have a combined allowance of £650,000 and their estate would only incur Inheritance Tax if it is worth more than £650,000.
The tax is normally paid from the funds in the estate, if available. It is the responsibility of the Executor or Administrator (if there is no Will) to arrange for the Inheritance Tax to be paid.
The tax rate is 40% of the estate that is above the individual’s allowance, if not married or the combined allowance in the case of a married couple or civil partnership. You’ll need to work out the value of the estate to know how much Inheritance Tax to pay.
The rate might reduce to 36% if at least 10% of the estate is left to charity.
Inheritance Tax is normally paid within six months after the person’s death. If the tax is not paid within six months, HMRC will start charging interest. In the case of property H M Revenue and Customs will allow the Inheritance Tax on the property to be paid by instalments over 10 years but the outstanding tax is still subject to interest charges. When the property is sold then the remaining Inheritance Tax must be paid in full.
H M revenue and Customs will allow the Executor or Administrator to pay money on account of Inheritance Tax if it is proving difficult to value the assets. This will avoid incurring interest on the Inheritance Tax due. H M Revenue and Customs will refund the estate if it has overpaid the Inheritance Tax and will pay interest on the overpayment.
Some gifts, business assets and agricultural property are exempt from Inheritance Tax and it is always worth checking to see whether the asset or gifts need to be declared and if so, what exemptions can be applied.
From 6 April 2017 everybody will get an additional £100,000 (rising to £175,000 by 2020-21) tax-free allowance to use against the value of their home. This allowance can also transfer to the surviving spouse or civil partner if it isn’t used up already. This means by 2020-21, a married couple or civil partnership could leave their heirs a combined estate of up to £1 million without incurring Inheritance Tax. They can only get this additional allowance if they leave their home to their children or grandchildren.