Probate guides

All about Inheritance Tax

Inheritance Tax can often seem daunting and complex, yet for the vast majority of estates it is not applicable.

In fact, according to the Institute for Fiscal Studies, fewer than 4% of estates paid Inheritance Tax in the 2020-2021 financial year, although due to an increase in wealth among older people, that figure is set to increase to over 7% by 2022-2023.

Nevertheless, for those who find themselves having to navigate IHT, there can be a lot to take in. So, let's break it down— who pays it, what are the thresholds, and why is it essential to address before the Grant of Probate can be issued?

Who pays Inheritance Tax?

In the UK, inheritance tax (IHT) is a tax on the estate of someone who has died, including their property, possessions, and money. The responsibility for paying this tax typically falls on the estate itself, not on the beneficiaries receiving the inheritance.

If there is a will, the named Executor(s) will be responsible for ensuring that the correct amount of Inheritance Tax is paid from the deceased's estate. If there is no will then the benefactor will have died ‘intestate’. In such circumstances, a beneficiary will normally step up and apply to be the Personal Representative for the estate and they will take on the responsibility of paying the Inheritance Tax.

What if there isn’t enough cash in the estate to pay Inheritance Tax?

In some cases, the estate may be valuable enough to qualify for Inheritance Tax but may not include sufficient cash with which to pay it. An example of this could include an estate that comprises a valuable property but little by way of cash savings.

In such circumstances, the person managing the estate may choose to use an Estate Advance to cover the cost. This is an Inheritance Tax loan, which allows the Executor or Personal Representative to borrow money to pay Inheritance Tax, which is then repaid out of the proceeds of the estate once assets have been sold to free up cash.

What are the Inheritance Tax thresholds?

The amount of inheritance tax due depends on the value of the estate left behind and any exemptions or reliefs that apply. As of the 2024/25 tax year, here are the basic thresholds and rates for inheritance tax in the UK:

• Nil-Rate Band: The nil-rate band is the threshold below which no inheritance tax is charged. For the 2024/25 tax year, this amount stands at £325,000.
• Residence Nil-Rate Band: In addition to the standard nil-rate band, there is the residence nil-rate band (RNRB). This applies when passing on a main residence to direct descendants (children, grandchildren, stepchildren, adopted or foster children). The RNRB for the 2024/25 tax year is £175,000.

These two bands combined mean that if a primary residence is passed to a direct descendent then there is no Inheritance Tax to pay up to £500,000.

Inheritance Tax for married couples or civil partners

When the first person in a marriage or civil partnership dies, their unused Nil-Rate Band and Residence Nil-Rate Band can be transferred to the surviving partner. This means that when the second person dies, the threshold doubles, meaning that the Nil-Rate band becomes £650,000 and an estate that also qualifies for the full Residence Nil-Rate Band does not pay Inheritance Tax on the first £1,000,000 that is passed on to direct descendants.

How is Inheritance Tax calculated?

Once the total value of the estate is determined, the tax is calculated at the following rates:

• Standard Rate: The standard inheritance tax rate is 40%.
• Reduced Rate for Giving to Charity: If at least 10% of the estate is left to charity, the tax rate reduces to 36%.

Importance of payment before Grant of Probate

Now, let's delve into why it's crucial to address inheritance tax before the Grant of Probate is issued.

Before the Grant of Probate can be issued, HM Revenue and Customs (HMRC) requires the inheritance tax to be paid, or at least a payment arrangement agreed upon. This is a critical step in the probate process, as it ensures that the tax obligations of the estate are settled before assets are distributed to beneficiaries.

It's important to note that HMRC can take some time to process the Inheritance Tax payment. Therefore, starting the process early and providing all necessary documentation promptly can help prevent delays in obtaining the Grant of Probate.

Payment options and deadlines

Once the inheritance tax amount is determined, it must be paid by the end of the sixth month and there are several ways to pay:

• From the Estate's funds: The tax can be paid using funds from the deceased person's estate provided there is sufficient cash.
• Seek a payment plan with HMRC: In some circumstances, HMRC may allow the Executor to enter into a long-term payment arrangement to spread the cost of Inheritance Tax.
• Use an Estate Advance for Inheritance Tax: A more flexible way of paying Inheritance Tax could be with an Inheritance Tax loan. We provide an Estate Advance for Inheritance Tax, allowing Executors to raise money to pay Inheritance Tax (or the first instalment of a payment plan that has been agreed with HMRC), with the advance repaid using the proceeds of the estate once assets have been sold to free up cash.