Your Guide to Inheritance Tax on Property

Did you know that HM Revenue and Customs (HMRC) charges Inheritance Tax (IHT) on property left by a deceased person, payable by those who inherit the property? The amount of tax due on the deceased's assets, property, and possessions depends on the value and who inherits it.

The inheritance tax depends on who you leave your property to, regardless of the kind of assets you own, their value, or location. In case you have declared assets abroad or you have dual nationality of any other country, then international inheritance taxes also play a role. 

Below is a brief guide on things you need to consider before filing for IHT. For further information, our team of IHT experts at Lawrence Grant will be more than happy to assist you in calculating and filing your taxes.

What is Inheritance Tax?

If you plan to leave your assets to your family, you must already be familiar with the term IHT. This is an amount due on assets, including property, money, savings, and even gifts the deceased gave to individuals in the last seven years of their life. However, this tax only needs to be paid after clearing the deceased's debts. 

According to HMRC, every individual has an allowance of £325,000, known as 'Nil Rate Band'. Anything above this threshold is eligible for IHT tax. However, even if the value of your total assets is below £325,000 you still need to mention it to HMRC.

Who Pays Estate Taxes?

Whoever inherits an estate, money, or property must pay estate tax on it. In case of a will, the executor must pay the estate tax after clearing the funeral costs and debts. In case of the absence of a will, a friend or relative who is able and willing can apply for the “Grant of Letters of Administration”. Through this grant, the relative becomes the estate's administrator, who evaluates the estate, pays off any outstanding debts before the estate becomes liable to pay IHT. If you have dual nationality or have assets in more than one country, your tax will be calculated according to international tax laws. Therefore, you will need to consult an international tax advisor.

There are various ways by which the inheritors can pay the estate tax:

• Selling the assets
• Utilising the funds present within the estate
• Directly via 'Direct Payment System' (DPS) is the amount present in the deceased's bank account. Through DPS, the inheritor can either use the whole amount in the account or some of it to pay taxes.

However, if you leave your estate to your registered spouse or partner in a civil relationship, then your surviving partner will inherit everything without the need to pay IHT, and it will only apply to the estate after your surviving partner dies and the property is transferred to other descendants.

How Much is Estate Tax?

The standard IHT by UK law is 40% of the asset's total value. However, it is calculated after clearing the funeral cost, debts that the deceased owes, and then considering all the deceased's assets. After this, a tax bill is raised, which the inheritors must pay within 6 months. Once this time period has ended, HMRC starts charging the inheritors for late dues. However, in some cases you may not be able to pay IHT at once and need to sell assets to pay the tax. In such cases, you can pay HMRC in instalments, but this will be liable to accrue interest. You can choose to pay over a 10-year instalment program subject to interest accordingly. 

Typically not everyone has to pay taxes, except inheritors of those individuals whose 'Nil Rate Band' exceeds the threshold amount i.e. £325,000. Exemptions are in the following cases:

• The value of total assets is below the £325,000 threshold
• If your assets are above the £325,000 threshold, then your next of kin is your spouse, registered civil partner, a charity organisation, or a community amateur sports club
• The gifts you have given to your descendants or relatives within the last seven years of your life are within £325,000
• Also, you no longer use or benefit from these assets you have gifted
• In the case of a home, your threshold limit will increase to £500,000 if your children or grandchildren are your next of kin
• The threshold limit can increase to £500,000 if the total value of your estate is less than £2 million

However, if you decide to leave your property to your children or other descendants, there are ways by which you can protect your estate from falling into the inheritance trap.

Drafting a will helps you not only control who gets what from your assets but also reduces a considerable taxable amount while, in some cases, nullifying it. The more you plan your IHT, the less your inheritors will need to pay. At Lawrence Grant, our team of inheritance tax specialists can help you in calculating the correct amount of taxes that can be paid within the due date.