Estimating how much liability you could leave behind for your loved ones
Usually the ‘executor’ of the will or the ‘administrator’ of the estate pays Inheritance Tax using funds from the estate.
An executor is a person named in the will to deal with the estate – there can be more than one. An administrator is the person who deals with the estate if there’s no will. Trustees are responsible for paying Inheritance Tax on trusts.
Work out if Inheritance Tax is due on an estate
To estimate how much Inheritance Tax you could have to pay, add up the value of all your wealth, subtract your liabilities and the £325,000 nil rate band allowance, and then multiply the remainder by 40%.
If you are married or in a registered civil partnership, add up your combined estates and reduce these by two nil rate band allowances of £325,000 each (£650,000) before applying the 40% rate to estimate your potential liability to Inheritance Tax.
Married couples and registered civil partners are allowed to pass their possessions and assets to each other Inheritance Tax–free, and since October 2007 the surviving partner is now allowed to use both Inheritance Tax–free allowances (providing one wasn’t used at the first death).
Gifts made within the last seven years are not included in the calculations but may be liable to Inheritance Tax on a sliding scale.
The calculation for valuation of your estate is for your general information and use only and is not intended to address your particular requirements.
It should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation.
If Inheritance Tax is due on the estate, you would need to complete HM Revenue & Customs (HMRC) form IHT400. You may also need to send other forms at the same time.
If no Inheritance Tax is due, you’ll need to complete form IHT205 to tell HMRC that no IHT is due on the estate.
You or your solicitor will need to send the forms with your application for probate (‘grant of representation’). This is called ‘confirmation’ in Scotland.
The grant of representation (confirmation) gives you the right to deal with the estate as the executor or administrator.
Deadline for paying Inheritance Tax
The executor of a will or administrator of an estate usually has to pay Inheritance Tax by the end of the sixth month after the person died. After this, the estate has to pay interest.
You can make early payments before you know what the estate owes. Interest isn’t due on this amount.
You can pay Inheritance Tax in instalments over 10 years on things that may take time to sell, for example, property and some types of shares.
There are different deadlines for paying Inheritance Tax on a trust.
Inheritance tax checklist
10 steps to protect your family from a potential Inheritance Tax bill
1. The main ways to avoid Inheritance Tax are to spend your money while you are alive or give it away.
2. Work out how much Inheritance Tax might be due on your estate and regularly review it so you know what potential liability there is.
3. Find out if the rules which took effect from October 2007 which mean that married couples and registered civil partners can now make use of each other’s tax-free allowance without special tax planning apply to you.
4. If you set up special wills to deal with Inheritance Tax, review if they are still relevant.
5. Make full use of any tax-free gifts you can make while you are alive.
6. Put life insurance policies under an appropriate trust.
7. If there’s going to be a big Inheritance Tax bill, think about taking out an insurance policy for your heirs to pay
8. Make a will if you don’t have one, otherwise the people you want to inherit may not.
9. Anything you leave to charity is free of Inheritance Tax, so it can be a useful way of reducing your potential Inheritance Tax liability while benefiting a good cause.
10. Never take steps that might leave you struggling for money while you are alive in order to save tax after you’ve died.