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Do I need to pay Inheritance Tax?

Managing Money

What is Inheritance Tax?

Inheritance Tax is a tax you have to pay upon inheriting the estate of someone who has died, including all of their property, possessions and money. It needs to be paid by the executor. Inheritance Tax must be paid or partially paid before probate or letter of administration can be granted, although there are some exceptions. Inheritance tax is sometimes referred to as Capital Gains tax.

What is the threshold for paying Inheritance Tax?

You will need to pay Inheritance Tax if the estate is valued at over £325,000. Usually, anything over this threshold is taxed at a rate of 40%. However, there are many exceptions to this.

For more information: gov.uk

There are many other possible assets that might need to be added to the value of the estate to comply with estate law. These include interests in trusts (which might have arisen on the earlier death of a spouse), transfers of value within the last 7 years, or gifts made at any time where the person who has died retained some kind of benefit in the asset given away,  An example of this might be putting a house in the name of children, but continuing to live there or visit on holiday.

Typically, no Inheritance Tax is due if:

  • The value of the estate (taking into account all of the issues above) is below £325,000 – this is known as the Nil Rate Band (NRB)
  • Everything above the threshold is left to a spouse or civil partner, or
  • Everything above the threshold is left to an exempt beneficiary such as a charity

You are obliged to file a report with HMRC even if there is no tax to pay. You can do this here: gov.uk

If you don’t need to pay Inheritance Tax, skip to Step 3: Applying for Probate or Letter of Administration

Where do you get the money to pay?

Banks or building societies may release money out of your loved one’s account before probate or letter of administration has been issued if it is being used to pay Inheritance Tax directly to HMRC. If you are paying Inheritance Tax on property, HMRC may accept staggered payments spread over a period of time. If you pay the Inheritance Tax out of your own money, you can get a refund from the estate once probate has been granted.

How to pay:

  1. Value your loved one’s estate (Step 1)
  2. Decide whether it is likely that you will need to pay any Inheritance Tax based on the information in Step 2
  3. Report the estimated value of the estate to HMRC (even if you will not need to pay Inheritance Tax)
  4. If you think you need to pay Inheritance Tax, apply for a reference number. This needs to happen at least three weeks before you make a payment.

Feeling a bit stuck?

Sometimes getting a professional to take over helps moves things along. We offer a range of solicitors who can help take away the pressure of dealing with estate law and wills.

Next Step: Applying for Probate or Letter of Administration