Who is Liable to Pay Inheritance Tax
There is some confusion about who has to pay inheritance tax. The name suggests that it is the heirs and beneficiaries who pay the inheritance tax bill (IHT bill). However, the tax amount is taken from the estate of the deceased.
You have to pay the IHT bill to the HMRC. HMRC stands for Her Majesty’s Revenue and Customs and is the tax authority of the U.K. government. It is responsible for
- paying child benefits,
- collecting taxes,
- enforcing custom laws and taxes,
- regulating and monitoring the payment of minimum wage by employers.
Who pays inheritance tax?
So who is responsible for paying inheritance tax in the UK?
The inheritance tax bill is paid from the estate of the deceased person.
The estate will attract an inheritance tax bill if the inherited assets are worth more than the nil-rate band inheritance tax threshold set at £325,000. Calculating your IHT bill can be tricky without the help of a professional.
The executors (if there is a will) or administrators (if there is no will) are responsible for organising the payment of IHT. This payment is made from the bank account or other qualifying assets of the deceased.
HMRC collects all the IHT payments in the UK. Ensure proper estate planning in your lifetime, because even though you don’t need to pay the IHT bill in your lifetime, it leaves your heirs to pick up the pieces after you.
Find out if your estate can attract inheritance tax.
How to Pay the Inheritance Tax
A large amount of the tax has to be paid before a Grant of Probate (in case of a will) or Letters of Administration (in case of no will). The HMRC expects the executors/administrators to get a bridging loan in the absence of liquid funds. This enables the Grant to be issued and the property sold.
Grant on Credit: In very exceptional cases HMRC will issue a grant on credit to pay the IHT bill. This is very technical and you must take professional advice if you’re getting one. The IHT bill can be paid when the property is sold for liquidity.
Gift Tax: If the deceased made many gifts during the last seven years of their life, and the amounts exceed the nil rate band of £325,000 then the recipients of the gifts need to pay 40% of the value of the gift as inheritance tax.
What is Inheritance Tax
Inheritance tax is the amount imposed on inherited estate. This estate attracts inheritance tax if the estate exceeds an amount of £350,000, which is the tax-free threshold.
The limit for a married couple is £650,000.
This rule allows the surviving spouse or the civil partner to inherit the estate inheritance tax-free. This rule may allow IHT bill exemptions of up to £1 million by raising the nil rate band.
The inheritance tax is imposed by the U.K. government to promote savings. The tax allowances are designed to redistribute wealth evenly and incentivise earning an honest living.
Inheritance tax planning can be both easy and difficult. You may miss out on ways to save tax if you’re planning your estate yourself.
Paying Inheritance Tax
Inheritance tax has to be paid after 6 months of inheriting property. The due date will be 6 months after inheriting the property. For example – If the deceased left assets to their beneficiaries/heirs on 1 January, the due date to pay the IHT bill would be 1 July.
The executor and administrator are responsible for ensuring that the IHT bill is paid on time. They have to pay the inheritance tax out of the deceased’s estate. They might have to get a small bridging loan to pay the IHT bill if the estate doesn’t have liquid funds.
You can avoid paying inheritance tax if you reduce your assets and reduce them below the nil rate band. You can do this in a number of ways –
- Giving gifts
- Leaving assets to spouses/ civil partners
- Making trusts
- Leaving assets to charity
- Writing wills
Proper estate planning can help you keep a balance of assets in a way that you don’t attract inheritance tax.
Conclusion
Inheritance tax in the UK is calculated at 40% of the estate at the time of death. But there are ways to save on this tax.
Although you don’t have to pay the inheritance tax bill in your lifetime, it will still go out of your estate, leaving your heirs and beneficiaries with less. You’ll have to name executors/ administrators who will be responsible for paying your IHT bill after your death.
Trusted inheritance tax planners can help you plan your assets and avoid tax.
You can avoid taxes in a number of ways suggested by HMRC.