Understanding Who Pays Inheritance Tax

The simple answer to the question Who Pays Inheritance Tax (IHT), is that Inheritance Tax (IHT) is due when a person’s estate (their property and possessions) is worth more than the ‘IHT Threshold’ when they die and the elected Executor of the deceased will need to make the necessary arrangement to pay the tax.

The current IHT Threshold is £325,000 per person however this is doubled to £650,000 for a married couple (on condition that the first person to die leaves their entire estate to their partner).   Anything over the IHT Threshold is then subject to Inheritance Tax which is currently 40%, although the rate may be reduced to 36% if more than 10% of the estate is left to charity.  Should the estate’s value fall below the threshold the Executor will still need to report it to HMRC.

So who pays Inheritance Tax when you die.

Usually the Executor or personal representative for the person who has died pays IHT using the funds from the estate.  If the estate has been held in Trust then the Trustees are responsible for paying the IHT .   Trusts are a tax efficient way of looking after assets (money, investments, land or buildings) for people and we will discuss Trusts in another article.
If you have received an inheritance or a gift from someone who has died then normally IHT will be deducted before you receive it, unless:

  • it states in the will that the recipient should pay Inheritance Tax
  • the deceased’s estate can’t pay it

Other factors to be aware of include:

  • Some gifts you give while you’re alive may be liable for IHT after death, depending on when the gift was given however ‘taper relief’ might mean the Inheritance Tax charged is less than 40%.
  • Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill. Contact the Inheritance Tax and probate helpline about Agricultural Relief if your estate includes a farm or woodland.

Reducing your Exposure to IHT

The use of Trusts or Gifting Assets area a couple of methods which can be employed to reduce Inheritance Tax due on death, but it’s necessary to reorganise your estate while you are alive. There are complicated rules that set out how these strategies can be used so we highly recommend you discuss the full options available to you with our staff at Bourne Accounting.

For instance; Married couples and registered civil partners are allowed to transfer assets to each other during their lifetime or when they die without incurring an Inheritance Tax charge. There is no limit to this relief as long as the receiving spouse or civil partner is UK domiciled. This relief is known as the spouse or civil partner exemption (nil rate band).  The basic tax-free threshold available when a wife, husband or civil partner dies can be increased to as much as £650,000 if none of the £325,000 threshold was used when the first of the couple died.   If the entire estate is passed to a surviving spouse or civil partner no Inheritance Tax would be payable due to the spouse or civil partner exemption, so for these couples the nil rate band used to be potentially wasted on the first death. To counter this, legislation was introduced that allowed the unused nil rate band on a first death to be passed, by claim, to the surviving spouse. This applies to second deaths on or after 9 October 2007.   This additional relief should be taken into account when you are planning your estate tax position. Evidence of the position from the first death should be retained.

Rules of intestacy/ intestate

If you die intestate (without a valid will) the rules around who pays Inheritance Tax change and your personal representatives will have to distribute the estate according to the laws of intestacy.
Many people die without making a Will. In legal terms, this means they die “intestate”. When this happens, the estate must be shared out according to certain rules. Individuals who may benefit under these rules are:

  • Married partners and civil partners at the time of death. This includes separated partners but not divorced partners or a civil partner if a civil partnership has ended.
  • Children, grandchildren and great grandchildren, if the estate is over a certain amount.
  • Parents, brothers and sisters, nieces and nephews.
  • Grandparents, uncles and aunts.

The order in which estates of those who die intestate are distributed follow strict rules. For example:

  • if there is a surviving partner, a child will only inherit from the estate if it is valued at more than £250,000.
  • Partners who are unmarried, or not in a formal civil partnership, have no claim on their deceased partner’s estate.
  • When family groups are affected by divorce, re-marriage, or co-habiting and there are children involved, the actual rights of family members to share in a deceased’s estate can be complex, and may result in assets of the estate being distributed in a way at variance with the unwritten wishes of the deceased person.
  • The estates of persons, who die intestate and have no relatives, are passed to the Crown under the “Bona Vacantia” rules.

For these reasons, everyone should prepare a Will and make their intentions known and legally enforceable.

Understanding who pays Inheritance Tax

If you are concerned about inheritance tax costs being a burden for your loved ones, ensure that you have all the information you need to ease your family’s inheritance tax costs by consulting with Paul at Bourne Accountancy online or call 01883 708090.  Bourne Accountancy also provides free business advice via our website, and dedicated IHT site We cover the following areas should you wish to meet in person: Addington, Ashtead, Banstead, Biggin Hill, Beckenham, Bletchingly, Bromley, Chipstead, Caterham, Carshalton, Coulsdon, Crawley, Croydon, Dorking, Godstone, Horley, Kenyley, Lingfield, Merstham, Oxted, Purley, Redhill, Reigate, Sanderstead, Selsdon, Shirley, Sutton, Tandridge, Tatfield, Warlingham, Westerham, Whyteleafe.