What is Inheritance Tax / IHT ?
Inheritance Tax (IHT) is usually payable on an Estate when someone dies.
IHT must be paid within 6 months of the death of the deceased at the rate of 40%, after taking into account the nil rate band for that year. Therefore, anything over the nil rate band is taxable at 40%. If the Estate is worth less than £325, 000 ( which is the current IHT tax threshold / nil rate band) and is an ‘excepted Estate’, no tax is payable. If the deceased died before 6 April 2009 click here to view the correct tax threshold for that year. If IHT is paid late then interest and penalties will also have to be paid.
Before you can apply for a Grant of Probate or Letters of Administration you must settle the tax position with HM Revenue and Customs.
Which IHT form to complete?
The IHT 400 must be completed where the estate is worth more than £325, 000. In some cases it may also need to be completed if the deceased was domiciled abroad but had assets in the UK.
Details of all assets must be included in this form and all supplementary pages must be completed. The form is very lengthy and details of all assets must be accurately stated wherever possible. If any information stated in the form is incorrect then the matter must be notified to HM Revenue and Customs as soon as it becomes apparent so tax can be recalculated.
You must also provide details of gifts or transfers made within seven years of the date of death since there may be tax payable on those gifts or transfers.
Note that funeral expenses, outstanding mortgages and other liabilities will all be deducted from the gross estate to provide a figure for the net estate.
If the deceased left a property then on the form the Personal Representatives or Administrators can opt to pay tax in instalments over 10 years until the property is sold. (It is important to note that once the property is sold the balance of the IHT becomes immediately payable. )
The IHT 205 ‘Return of Estate Information’ form is used where the estate is worth less than £325, 000 and is said to be an ‘excepted estate’. It is a much shorter form than the IHT 200.
What happens after the IHT form has been completed?
The tax return, whichever one is used, must be signed by all the Executors or Administrators.
The IHT 400 form plus any supplementary pages must then be sent to HM Revenue and Customs. It usually takes them a week to ten days to respond. If there is tax to pay then this must be settled before a stamped tax certificate can be issued. The stamped certificate is then sent to the Probate Registry Office with the application for a Grant of Probate or Letters of Administration.
If the IHT 205 has been completed, this does not need to be sent to HMRC and can be sent directly to the Probate Registry Office with the application for a Grant of Probate or Letters of Administration. The Grant will not be issued without it.
Transfer of unused ‘Nil Rate band’
A very important change came into force in October 2007 which allows the transfer of the unused nil rate band (IHT threshold ) of the deceased’s late spouse or civil partner to the deceased’s Estate. This means that the value of the nil rate band of £325, 000 on the deceased’s Estate could potentially swell to £650, 000 if the deceased’s spouse or civil partner did not use their full nil rate band.
If only part of the nil rate band was used then the amount that was not used can be transferred to the deceased’s Estate.
This is a huge and much needed change since it means that if a person dies without using their nil rate band fully then their spouse or civil partner’s Estate can take advantage of it without it going to waste.