Generally, Inheritance Tax will be handled by an executor of a will or an administrator of the estate. The IHT can be paid from funds within the estate, from money raised from the sale of the assets or through the Direct Payment Scheme (DPS). However, if the estate can’t or simply doesn’t pay IHT then the burden may fall onto those who are inheriting the assets.
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The rules for what’s owed can vary based on what kind of asset is being passed down.
For most assets, they could be considered what the government refers to as a “gift”. The government defines a gift as anything that has value which includes possessions, property and money.
Small gifts will usually not face IHT but others will count towards the value of the estate.
If gifts worth over £325,000 are given away than an IHT charge could be due.
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If an estate isn’t planned out thoroughly it could result in an unexpected bill (Image: GETTY)
In most cases an IHT bill will be handled by an administrator or executor (Image: GETTY)
If there is IHT to pay on gifts, it will be charged at 40 percent on gifts given in the three years before death.
Gifts made between three and seven years will be taxed on a sliding scale known as “taper relief”. The specific details are:
Years between gift and death Tax paid
Less than three 40 percent
Three to four 32 percent
Four to five 24 percent
Five to six 16 percent
Six to seven 8 percent
Seven or more 0 percent
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The government provides this example to illustrate how it could work:
Sally died on July 1, 2018. She was not married or in a civil partnership when she died. Sally left three gifts in the seven years before her death:
£300,000 to her brother 6.5 years before her death
£50,000 to her sister 4.5 years before her death
£150,000 to her friend 3.5 years before her death
Sally is not entitled to any other gift exemptions or reliefs.
There’s a £325,000 inheritance tax threshold. Anything below this amount is tax free. £300,000 is used up by the gift Sally gave her brother. There’s no tax to pay on his gift. The remaining £25,000 is used up by her £50,000 gift to her sister. There’s tax to pay on the amount not covered by the threshold.
That means there’s tax to pay on £25,000 of the gift to Sally’s sister at a rate of 24 percent. The £150,000 gift given to her friend is taxed at a rate of 32 percent. Sally’s remaining estate was valued at £500,000 and charged at the usual 40 percent Inheritance Tax rate. Sally used up the tax-free threshold on gifts given before her death.
HMRC will usually reach out directly to those who owe an IHT payment (Image: GETTY)
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IHT can also be affected by those who utilise joint property, shares and/or bank accounts.
The specific amount that will need to be paid will depend on how the shares, property or bank accounts were set up.
If the affected individual jointly owned the assets with the deceased they will be known as “joint tenants”.
If each owned part of the assets, they’ll be known as “tenants in common”.
For complex estates the government advices seeking out professional tax advice (Image: GETTY)
For joint tenants, the deceased person’s assets will automatically be inherited by the other tenant. The remaining tenant may have to pay IHT if the whole of the deceased’s estate if worth more than the £325,000 threshold and the estate itself cannot pay.
For tenants in common, IHT may have been paid on the deceased’s share of assets over £325,000. In most cases, the executor or administrator of the estate will pay the IHT out of the estates assets. However, if the estate doesn’t have enough money to pay the IHT on the deceased’s share of the assets, or the executor doesn’t pay, the remaining tenant in common will need to pay it. This could mean needing to sell existing shares or property to cover the debt.
The rules for how IHT is paid by an estate and/or inheritors can be complicated. Generally however, HMRC will contact anyone who needs to cover an IHT bill. The government can also be contacted for help on IHT, for particularly complex estates they advise seeking help from professional tax advisors or solicitors.