How does inheritance tax work?

Complicated tax forms and paperwork can be the last thing you want to deal with after the death of someone close to you. But sorting out inheritance tax is a necessary part of the admin when someone dies. The tax must be calculated and paid (if due) before you can apply for probate and carry out the other tasks needed before sharing out any inheritance.

What is inheritance tax?

Inheritance tax is a tax on certain transfers of wealth. Most often this is a tax on the value of someone's estate when they die. 

The estate is everything owned by the person who’s died, such as money, property, possessions and shares. Inheritance tax is usually paid from the estate before the rest is shared between those who are inheriting – called the beneficiaries.

What is the inheritance tax threshold?

You don’t pay inheritance tax on the first £325,000 of the estate. This is called the ’nil rate band’ – the threshold at which inheritance tax is due. In the UK that’s currently £325,000, so you don’t pay anything up to this amount.

Above the nil rate band there is a tax of 40% on the rest of the estate.

Married couples and civil partners can transfer any unused part of their nil rate band to their spouse or partner when they die. This is called the ‘transferable nil rate band’. This means couples can double the amount of their combined estate that’s exempt from inheritance tax.

Is it possible to pay less inheritance tax?

In some cases, inheritance tax can be reduced.

If the person who’s died leaves 10% or more of their net estate to charity, inheritance tax is 36% instead.

You may also qualify for an additional allowance called the ‘residence nil rate band’. This applies if the person who died:

• has an estate worth more than the inheritance tax threshold of £325,000
• left their main residence to direct descendants, like their children or grandchildren.

The residence nil rate band is currently £175,000.

Gifts to spouses, charities, political parties and certain other clubs might qualify for some exemptions. 

There are a few other reliefs available for certain business, agricultural and other assets.

If you are planning for the future there are some ways to minimise the amount of inheritance tax your beneficiaries will have to pay after you die. Most important is to have your will and other estate planning documents in order. A professional financial planner can advise you on other things you can do in some situations, such as setting up a trust.

How do I work out how much I’ll have to pay?

Inheritance is calculated on the total value of the estate.

This includes property, money, possessions and shares. If the person who’s died gave any gifts, including putting  money into trusts, these might also be subject to inheritance tax.

After you calculate the value of the estate, some expenses are taken off including debts and funeral costs.

The remaining amount is the net estate, which is subject to inheritance tax.

Example 1

• An estate is valued at £500,000.
• That’s £175,000 over the £325,000 nil-band threshold.
• 40% tax would be due on £175,000.
• 40% of £175,000 is £70,000 – this is the inheritance tax due.

Example 2

Someone dies and leaves to their children:

• Their home, worth £300,000.
• Their other assets, worth £135,000.

The Total estate value is £435,000

Less residence nil rate band of £175,000 = £260,000

Less basic nil rate band of £260,000 = £0.

Therefore, no inheritance tax is due. Also, in this example, £65,000 of the £325,000, or 20%, was unused.

The surviving spouse will get an extra 20% of basic nil rate band when they die.

Who is responsible for paying inheritance tax?

The estate’s executor or administrator is responsible for paying inheritance tax in most cases. 

The executor is the person named in the will to sort the estate and carry out the person’s wishes. If there’s no will or named executor, the next of kin or beneficiaries can apply to be the administrator of the estate instead.

How to pay the tax

You must pay any inheritance tax by the end of the sixth month after the person died, with the exception of any tax being paid by instalments. After this date, any outstanding tax starts to accrue interest. You can read about the different ways to pay on the government website.

The Direct Payment Scheme lets you pay any inheritance tax from the bank account of the person who’s died.

How Trustestate can help

Working out inheritance tax can be a challenging and overwhelming process. It's important to make sure it's done correctly and follows the wishes of the person who's died. Let Trustestate take out the hassle for a fixed transparent fee. We offer a simple, streamlined service with expert support at every stage.

What we offer

Use our Complete Probate service and we’ll manage every stage of the process – we’ll take over all the admin, apply to the court for probate, and share out the estate.

Or if the estate is simple and you have time, you can use our Grant of Probate service, and we’ll apply for probate using information you provide.

Whichever service you choose, you’ll get dedicated advice every step of the way, and an online platform to keep track of everything. Book a free call with one of our experts to find out more.

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