When do you need to pay inheritance tax on a Deceased’s estate?

It is imperative that IHT is paid or partially paid within the end of the 6 months from the date of death to ensure that statutory interest does not accrue on the amount of IHT due. Statutory interest is currently calculated at 2.60% and 0.5% on repayments.

To this extent, it is the Personal Representatives responsibility to ensure funds are available to settle any outstanding liabilities. Therefore, selling assets or raising fund using other means may be necessary.

To note, the Inheritance Tax threshold is currently £325,000 for individuals and £650,000 for married couples. Usually, anything above the thresholds will be taxed at 40%. Although, other exemptions and reliefs may be applied to an estate which may mitigate any Inheritance Tax payable. Additionally, if 10% or more of the estate is given to charity, then the tax rate is reduced to 36%.

Which assets need to be valued for inheritance tax?

The following assets need to be valued for IHT taxes, although this list is not exhaustive.

  • Monies held in Banks;
  • Properties;
  • Jewellery;
  • Cars;
  • Shares;
  • Any jointly-owned assets; and
  • Pay-outs from insurance policies.

Essentially, all money, property and personal chattels of the Deceased must be valued. In addition, some estates will require foreign assets to be declared. Furthermore, any relevant gifts made by the Deceased within 7 years must also be included.

Gifts made 3-7 years prior to one’s death are taxed using the ‘taper relief’ scale. Moreover, there also certain exemptions that apply and an individual has an annual exemption of £3,000, each tax year. You can carry any unused annual exemption forward to the next year – but only for one year. Meaning, you may have a £6,000 allowance to gift.

Bearing this in mind, there are other also other exempt gifts you can make in a tax year, such as the following:-

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child);
  • Christmas or birthday presents;
  • payments to help an elderly relative or a minor; and
  • gifts to charities and political parties.

The values of the assets should either be declared on form IHT205 (no tax to be paid) or IHT400, in the circumstances where IHT is payable. The estimated values must be declared on these forms.

In relation to valuations, any and all professional valuations should be submitted to the HMRC accompanying the relevant tax form, by way of evidence.

To note, if an asset transpires to be apparent after the forms have been submitted, meaning more IHT is payable than initially declared; HMRC must be immediately notified at least within 6 months from the date the forms are submitted.

How do you pay inheritance from your own bank account?

You can pay IHT from your own bank account using various methods, such as online or telephone banking, CHAPS or BACS and/or at your bank. The inheritance tax reference number must be used in all payments made to the HMRC, in this respect.

Furthermore, you can make payment from any joint accounts held with the Deceased, using the methods stipulated above.

Due to COVID-19, HMRC are currently not accepting cheques, in regards to IHT payments.

Any amount paid can be later reclaimed from the Deceased’s estate, once probate has been issued. Evidence in the form of bank statements or any correspondence received from HMRC in this connection, should be kept.

How do you pay inheritance from accounts owned by the deceased?

Using funds tied up in the accounts of a Deceased to settle IHT, is known as the ‘Direct Payment Scheme’. You must complete form IHT423, whereby; you state the following:-

  • Inheritance Tax reference number;
  • the Deceased’s account details; and
  • the amount to be transferred.

Once the form is signed by the personal representative of the estate, it must then be sent to the bank or building society concerned or to NS&I. The organisation concerned will then process the relevant payment and transfer directly to HMRC.

Can you pay inheritance tax before valuing the estate to avoid paying interest?

The three main tasks when valuing an estate include:-

  1. Contacting organisations;
  2. Estimating the estates value; and
  3. Reporting the value to HMRC.

It is possible to pay IHT prior to obtaining an estimate value of the estate. This will involve applying for an IHT reference number 3 weeks before an Executor intends to make a payment. To this end, this can be applied for online (except for trusts) or by post using form IHT422.

Subsequently, if the exact amount due it not known within the aforementioned time-frame; payment can be made on account known as ‘payment on account’. As a result, HMRC may reduce the interest, in view of any early payments.

Conversely, where an overpayment has been made HMRC will issue a refund including any interest accrued, after Probate has been granted.

Moreover, if monies are tied up in properties, the Executors can make arrangements with HMRC to pay by instalments over a period of 10 years, however; interest will be applied, in this circumstance.

Accordingly, all specific forms required by a personal representative when dealing with a Deceased’s estate can be found on the HMRC website. Alternatively, HMRC can be contacted via telephone and they can arrange for hardcopies to be sent out to an individual or agent acting for them.

An agent such as a specialist probate lawyer is strongly advised when filling out the IHT forms required to ease the burden of the form-filling and so an individual can obtain the specialist advice they require, as each estate differs.