The inheritance tax threshold for 2020/21 is £325,000. Anything over the threshold is liable to 40% tax – but it doesn’t apply to every case. Here, we’ll cover inheritance tax in more detail so you know what to expect when applying for probate.
The inheritance tax threshold for 2020/21 is £325,000 – this is also known as the nil rate band. If you’re the executor or administrator of an estate worth over £325,000, you may need to arrange for inheritance tax to be paid. This is usually charged at 40%.
If more than 10% of the estate is left to charity, the inheritance tax rate may be reduced to 36%.
The inheritance tax allowance doesn’t apply between spouses and civil partners domiciled in the UK. This means that, if the entire estate you’re dealing with has been left to the person’s spouse or civil partner, no inheritance tax will be owed – even if the estate is over £325,000.
The short answer: no. It’s actually possible for many people to double their inheritance tax allowance to £650,000. Here’s how…
If someone who is married leaves their entire estate to their spouse, their unused inheritance tax allowance of £325,000 will also pass to their partner. This effectively doubles the surviving spouse’s inheritance tax threshold to £650,000. The same benefit also applies to people in a civil partnership.
This means that, if someone’s spouse or civil partner dies and leaves them their entire estate, the surviving partner’s inheritance tax allowance will effectively be £650,000.
It’s also possible to increase your inheritance tax allowance by leaving property to certain people. This is thanks to an additional tax allowance that was introduced by the government in April 2017.
If property is left to children, step-children or grandchildren – or any of their spouses or civil partners – the estate receives an additional inheritance tax allowance of £175,000. This effectively increases the inheritance tax allowance to £500,000. Just like the nil rate band, this can also be transferred between married or civil partners.
This means that, if a surviving spouse or civil partner leaves their property to their children after inheriting all of their partner’s estate, the inheritance tax allowance will be £1,000,000.
Note: This additional allowance will increase every year in line with inflation, based on the Consumer Price Index.
If there is a will, the executor is responsible for paying the inheritance tax bill from the estate. If there isn’t a will, this is usually handled by the administrator.
Figuring out exactly how much inheritance tax is due can be difficult, so many people choose to use a professional probate service when dealing with their loved one’s estate.
Once the amount of inheritance tax owed has been calculated, this can either be paid from funds within the estate, money from the sale of assets, or through the Direct Payment Scheme (DPS). This is where inheritance tax is paid directly from the bank or building society of the person who died.
Inheritance tax ideally needs to be paid by the end of the sixth month after your loved one’s death. After this point, HMRC will start charging interest. They may also charge late payment penalties, which can be as high as £3,000 if the payment is more than 12 months late. It’s therefore important to apply for probate and gain access to the estate as quickly as possible.
IHT400 is a government form that needs to be completed in England, Wales and Scotland if the estate is liable for inheritance tax. This is a long, complex document with multiple sections for different types of assets, allowing you and HMRC to work out how much inheritance tax is due.
Unless you’re very familiar with tax forms and financial paperwork, IHT400 can be an extremely stressful and time-consuming form to fill out. For this reason, many people choose to use a professional probate service instead.
If you think you may need to pay inheritance tax and want help working out how much is due, call our probate specialists today on 020 3695 1713. We can provide a free, no obligation quote in just a few minutes.
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