In view of many enquiries regarding Inheritance Tax, our Director, Raza Laghari has put down all the basic information that you need to know about what is Inheritance Tax, when do you need to pay the IHT, what assets go in valuation for IHT and whether you pay the IHT from your accounts or the deceased accounts. The current threshold for IHT is £325,000 for individuals and £650,000 in case of married couples. The basic rate for IHT is 40% of what is inherited beyond the thresholds.
However, our accountant can help you bring down your IHT bill by taking benefits of available exemptions and reliefs. For example, if 10% or more of the total estate is donated to any registered charity, the IHT rate will lower down to 36%. For all residential properties that are valued below £2 million and where the deceased has lived at time of death, there is additional nil rate band of £175,000 for individuals and £350,000 for married couples.
WHICH ASSETS ARE VALUED FOR INHERITANCE TAX?
Essentially, all assets in form of money, property and personal possessions must be included in probate valuation. These will include;
- All bank accounts held in UK or abroad,
- Properties; whether residential or commercial,
- Shares and investments,
- Any jointly held assets,
- Jewellery and all other valuable personal effects.
- Pay-outs from insurance policies
Properties and other such unique assets like jewellery will need to undergo professional probate valuation. For assets like vehicles, you can always use publicly available data like second hand vehicle price guides. It is essential that you submit source of valuation as evidence to HMRC. If you have no IHT payable, you will submit Form IHT205. You will submit Form IHT400 if you have any IHT payable.
Please note that you have to declare any foreign assets and any gifts made by the deceased in last 7 years for the valuation of Estate. In case, you discover any assets after the forms have already been submitted, it is your legal duty to notify HMRC within six months of the date when forms were submitted.
WHEN DO YOU PAY INHERITANCE TAX?
Inheritance tax must be paid within six moths after the end of month in which the deceased passed away. For example, if the deceased died on 20th March, 2020, you must pay the IHT within six months of 31st March 2020, that is 30th September 2020.
If you delay the payment, you will be bound to pay statutory interest which is currently calculated at 2.60%. In order to avoid accruing this statutory interest, you six months to sort out probate valuation and other gifts issues.
If you want to avoid paying interest, you can use prepayment before probate option. You will submit Form IHT422. HMRC may reduce interest on early payments and will refund with interest any overpayments. Where the money is tied up in properties, you can opt to pay in instalments with interest over 10 years period.
HOW TO CALCULATE INHERITANCE TAX PAYABLE ON GIFTS?
Every individual has an annual allowance of £3000 per tax year. Unused allowance can be carried forward for one year only. This means you can have a maximum of £6,000 exemptions on gifts received. Beyond which they will be charged at a rate depending on time between when the deceased gifted you and when they passed away.
|Years between gift and death||Tax rate payable|
|Less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
Please note that the gifts use nil band allowance before any balance is applied to the individual’s estate.
There are also certain exemptions to taxable gifts which include;
- Any wedding or civil ceremony gift up to value of £1,000 per person. The exemption bar is raised to £2,500 for grand-children or great-grand children and £5,000 for children.
- Birthday/Christmas presents that were made out of normal income
- Gifts to any registered charity or registered political party
- Any payments made to elderly relative or a minor for assistance with normal living costs
HOW CAN YOU PAY THE INHERITANCE TAX?
You can pay the IHT from the deceased’s account, joint account held with deceased or your personal account.
When you are using personal account or joint account with the deceased, you can use online of telephone banking, CHAPS or BACS.
When you pay the IHT from the deceased account, this is called Direct Payment Scheme. You have to submit Form IHT423 . Please fill in these details very carefully;
- Inheritance Tax Reference Number
- Deceased’s account details
- Amount to be transferred
This form will also need signatures of Personal Representative appointed by nomination in deceased’s will or by legal nomination where there is no will. The signed form will be forwarded to the building society, bank or National Savings & Investments; who will make the payment to HMRC from the deceased’s account themselves.
if you have quire then visit our Tax Consultant page!