We regularly receive inquiries about how UK inheritance tax works in deceased estates, and decided it was time to post an update. The value of an entire estate is potentially subject to this tax. And this includes any gifts the deceased made during the seven years prior to their death.
Exemptions from Inheritance Tax in the UK
However, there are several exceptions to this general rule, according to the Institute for Fiscal Studies. For example, bequests and gifts to a spouse or civil partner are automatically exempt. The same benefit applies to bequests to charities, political parties, and registered community amateur sports clubs.
Certain trading assets may also receive relief, for example those used for agricultural, or commercial gain. Personal pension pots are not part of a deceased estate either, at least for inheritance tax purposes. Gifts of up to £3,000 in each tax year in total, are also exempt, and unspent credits may accumulate.
However, other larger gifts made during the seven years prior to death, do potentially incur inheritance tax. This reduces on a sliding scale, because this is how UK inheritance tax works. The policy is part of an anti-tax-avoidance strategy, to discourage artificially down-sizing the value of an estate prior to death.
However, and here’s another catch. The recipient of a gift must continue to benefit from it during the balance of the seven-year period. To cite one example, if the gift were to be the deceased’s motor car, then they would have to transfer ownership.
A Tasty Treat for an Heir © Avery Associates
Thresholds After Which UK Inheritance Tax is Due
The UK Nil Rate Band of £325,000, is the point above which a deceased’s estate is liable for inheritance tax. This has been the norm since 2009 / 2010, and is highly likely to continue through to 2027 / 2028.
If a person dies and their estate is worth less than the NIL Rate Band, then any living spouse or civil partner could receive a credit for the balance. This is however only true if:
- The marriage or civil partnership existed at the time of the death.
- The tax office received an application within two years of the death.
The Nil Inheritance Tax Rate Band For a Residence
The UK Nil Rate Residence Band of £175,000, applies when a deceased leaves their main residence to their direct descendants. Or, if they sold it, and left a higher amount (within the band) to one or more of those children and grandchildren.
As is the case with the Nil Rate Band, the surviving spouse or partner receives a credit for any surplus amount. Although, again, the relationship must be ongoing at the time of death, and application must be made within two years.
How UK Inheritance Tax Works in Practice
The general rate of UK inheritance tax is 40%, but there are exceptions. For example, if the deceased leaves at least 10% of their net value to charity, then the rate falls to 36%. The actual rate is also lower in respect of gifts made between three and seven years before death:
- If six to seven years have elapsed, then the tax rate is 8%.
- The rate increases to 16%, if just five to six have passed.
- If four to five years have elapsed, then the rate is 24%.
- The rate increases to 32%, if only three to four have passed.
- The full 40% applies to gifts made within three years of death.
It is worth noting here, that beneficiaries of gifts may have to pay inheritance tax themselves. Although this is usually only the case if the deceased gave away more than the nil-rate band.
All These Items Must be Valued First (Image © Avery Associates)
Who Is Responsible For Paying Inheritance Tax?
The person responsible for administering a deceased estate, has a legal duty to pay over any inheritance tax due. Executors and administrators must therefore identify and value the assets and debts of the deceased. As well as any gifts the deceased may have made, during the seven years prior to their passing.
This information will help them calculate the net value of the estate, and determine whether any inheritance tax is actually due. The rules governing reporting the outcome are complex, and best researched by following this link.
What is crystal clear though, is that inheritance tax should be paid from the estate within six months from death. Although it is usually possible to negotiate staggered payments, if fixed property, or shares and securities, are proving difficult to sell.
How Avery Associates Values Deceased Estates
Executors and administrators must value an estate accurately, in order to meet the obligations of inheritance tax. Avery Associates regularly values land, buildings, and collectible items for those managing estates. Give us a call and experience our professional expertise, and surprisingly affordable rates. Then let’s see how we can help.
More Information
Responsibility for Property in a Deceased Estate
Capital Gains Tax on Chattels Sold
I cannot thank Mr Avery enough, the valuation was prompt, accurate and accepted easily by HMRC. I would thoroughly recommend this company if you are in need of IHT valuations of house contents. (Jamie)
