Probate & Inheritance Tax

Pete Liggins
September 22, 2022
Understanding inheritance tax and how it works can be difficult when there are so many varying terms and conditions. To help you get started, we have put together a brief Q&A to explain the basic things you need to know about inheritance tax as an executor. 

What is inheritance tax and how much is it?

Inheritance tax is tax on the estate (property, money, possessions) of someone who has died. Informing HMRC of a person’s death and then carrying out a probate valuation of the estate to determine inheritance tax is the first step of the probate process. 

The standard rate of inheritance tax is 40%, but this is only charged on the parts of the estate that exceed the tax-free threshold, typically £325,000. However, the estate can pay a reduced rate of 36% on some assets if 10% of the estate’s net value is left to charity in your will. 

Business relief is also another way that inheritance tax on certain assets can be reduced, this only applies if the deceased was an owner or shareholder of a business. Where appropriate, the executor can apply for this by completing a HMRC business or partnership interests and assets form.

Who pays inheritance tax?

Money from the estate of the person who has died is used to pay inheritance tax to HMRC, it is the responsibility of the executor to uphold this. 

It is unusual for beneficiaries (those who inherit) to directly pay inheritance tax on their inheritance. However, occasionally they may be required to on gifts that were given before the person died if they were within a certain period and exceeded the threshold, more on this shortly. 

When does inheritance tax NOT apply?

You will be pleased to hear that there are some situations where you do not have to pay inheritance tax at all, these may include:

  • If the value of the estate is below its tax-free threshold, this is usually around £325,000.
  • If something has been left to a spouse or civil partner, even if it is above the threshold. 
  • If the home of the deceased is passed on to a spouse or civil partner, they are generally exempt from all inheritance related taxations. However, if the home is passed to anyone else after the owner’s death, it will be included in the estate value and may be taxed.

A home can be given as a gift and without inheritance tax as long as the original owner who is gifting it moves out and it is seven or more years prior to their death. If they die within seven years of gifting it, the seven-year rule comes into play. 

What is the seven-year rule? 

The seven-year rule relates to gift-giving and inheritance tax. Depending on who the gift is given to and their relation to the owner, the value of the gift, and when it was given, gifts that are given seven years or more before the owner’s death may not be taxed. 

What is legally considered a gift?

Anything bequeathed in a will does not count as a gift, it is inheritance and will be treated as part of the estate. However, gifts include but are not limited to:

  • Money
  • Household or personal items such as cars, clothes, furniture, antiques, art, jewellery, etc. 
  • Land or buildings 
  • Listed stocks and shares

Note that any money lost when the deceased sold something to someone they knew for a reduced rate, can also be considered a gift. For example, if they sold their home to one of their children for less than its value. 

Additionally, inheritance tax does not apply to gifts given between spouses or civil partners, as long as the recipient is a permanent UK resident they can be gifted as much as the owner wishes.

How is inheritance tax paid on gifts? 

Like all other assets, inheritance tax on gifts are paid through the estate’s funds, as long as the deceased hasn’t given away more than £325,000 in gifts in the last seven years. 

If this amount is exceeded, anyone who has received a gift will have to pay the inheritance tax on it. 

The percentage of tax varies according to when in the seven-year span it was given. 

Keeping a record of gifts

It is extremely important to keep a record of any gifts you’ve given because when the time comes, your executor will need to try and work out exactly what has been gifted in the last seven years to determine the inheritance tax rate. 

You should keep a record of: 

  • Gifts given and their recipients
  • The value of the gifts
  • The date they were given

Are you looking for a probate valuation?

Our specialist team of probate experts would be more than happy to assist you.

All our valuations are HMRC compliant and can be used for inheritance tax calculation purposes.

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