A Guide to Inheritance Tax Forms
When you’re grieving for a loved one, red tape is the last thing you need. Sadly, that’s what the laws and paperwork around Inheritance Tax (IHT) throw up. The forms can be horribly confusing, making it very difficult to figure out what exactly is payable.
With rising property prices, more people than ever are liable for the tax. In 2018, HMRC pocketed £5.2 billion from IHT, an increase of £400 million on 2017’s figures. It’s a number predicted by NFU Mutual to rise to £6.5 billion for the 2018/19 tax year.
What is Inheritance Tax?
Inheritance Tax is a tax on the estate of someone who’s died. It includes their property and possessions. Today, around only one in twenty UK estates is liable to pay Inheritance Tax.
When is Inheritance Tax payable?
Inheritance Tax becomes payable when the value of the deceased’s estate tops £325,000. It’s payable at 40% on anything above this threshold (the ‘nil rate band’).
However, transfers between married couples and civil partners aren’t subject to IHT. So the figure rises to £650,000 for married couples where the first to die leaves their assets to their spouse.
A new ‘residence nil rate band’ allowance is also being gradually introduced. In some circumstances, this can bump up the standard nil rate band.
The residence nil rate band is worth £125,000 and will increase to £175,000 per person by April 2020. That’s provided the estate isn’t worth more than £2m.
You can use this allowance only if direct descendants, such as your children or grandchildren, are inheriting your home. The allowance falls by £1 for each £2 that the estate’s value exceeds £2m. At present, it doesn’t apply to estates worth £2.25m or more.
How can I avoid Inheritance Tax?
When the residence nil rate band rises to £175,000 by 2020/21, couples will be able to bequeath property worth up to £1 million without paying Inheritance Tax.
In theory, you can gift however much you like in this way. Note, though, that you have to live for at least seven years after the gifting for your generosity to be fully exempt from Inheritance Tax.
Here’s how to reduce your IHT bill:
- Leave money to charity
- Open up a trust for your heirs
- Bequeath your estate to your partner
- Opt for a pension, not a savings account
- Give away £3,000 a year in gifts
If you want more advice on minimising your IHT bill, Moneywise has prepared a handy guide.
How much Inheritance Tax might I pay?
If the value of the estate is less than £325,000, relax. If it’s more, let’s take a look at what you might pay. (Of course, the good news is, whatever you pay, you won’t know much about it.)
You’ll pay 40% on the value of your estate above the nil rate band. That means that, if your estate is worth £725,000, you’ll be charged tax on £400,000 (£725,000 minus £325,000). So your estate would be subject to £150,000 (40% of £400,000) in IHT.
If your estate is worth £350,000, you’ll pay Inheritance Tax on just the £25,000 above the nil rate band threshold. At 40%, that would be £10,000.
The £325,000 figure is fixed until 2021. However, it can be worth more for widows or civil partners. The law allows couples to transfer unused nil rate band to the survivor.
Doing this can double the nil rate band to £650,000. It’s called transferable nil rate band (TNRB).
How do I value an estate?
If you’re not engaging a solicitor to help with the estate, you’ll need to work out its value yourself.
To do this, you must:
- List every asset and calculate what they’re worth on the date of death
- Deduct all debts and liabilities
Be sure to keep a log of how you worked it out. Where property is involved, for example, you’ll need estate agents’ valuations. Note that HMRC has up to 20 years after Inheritance Tax is paid to check your records.
What do assets include?
- Cash in the bank
- Insurance payouts.
You can find a more comprehensive list on Gov.uk.
Remember gifting? You’ll need to list any cash or other assets that the person handed over in the seven years before they died. Include any gifts before this time if the giver continued to benefit from the gift. For example, they ‘donated’ their house but carried on living there. The law calls these ‘gifts with reservations of benefit’.
What about those debts and liabilities?
Debts and liabilities reduce the estate. They will include such things as a mortgage, credit card bills, everyday bills and, of course, funeral expenses.
Don’t get too excited, though. You can’t deduct any costs that arise after death from the estate for IHT purposes. These might include legal fees and probate fees.
There’s more information on the GOV.UK website about the elements of an estate liable for Inheritance Tax.
When do I pay Inheritance Tax?
When it comes to paying Inheritance Tax, you’ll need an IHT reference number. You’ll have to get hold of one at least three weeks before you make a payment. You can do it online or through the post.
The bad news is you must pay your Inheritance Tax bill by the end of the sixth month after the death. If you’ve not paid by then, HMRC will charge you interest.
Executors of the will can elect to pay Inheritance Tax on some of the assets in instalments over ten years. That doesn’t make them exempt from interest, though.
If you sell the asset (let’s say the house) before all the tax gets paid, the executors will insist that all the instalments and interest are paid in full straight away.
A payment on account can be a good idea. That’s where your executor pays some of the tax within six months of the death, regardless of whether the estate has been fully valued or not.
Doing this will reduce the interest that could be charged if it takes too long to sell the house. Executors can pay the tax from their account and claim it back later from the estate.
What’s exempt from Inheritance Tax?
Here’s the good-news bit. Some gifts and property are exempt from Inheritance Tax. These include wedding presents and charitable donations. It’s worth investigating if particular types of property, such as farms or business premises, offer tax relief as well.
How much you’ll be due to pay depends on the gift’s value, when it was donated and to whom. You can find out more about Inheritance Tax exemptions on the Money Advice Service website.
What tax forms do I use for Inheritance Tax and where do I send them?
First up, you need to apply for a ‘grant of representation’ from the Probate Service. This enables you to obtain probate. That’s the right of the executors who’ve been named in the will to deal with the estate of the deceased.
Once you’ve got this grant, you can get access to things like bank accounts, investments and assets. You can then start to assess what the estate is worth and whether you’ll need to line HMRC’s coffers. You must pay IHT before probate can be granted.
Now let’s get on to those forms.
You’ll need to complete some IHT forms when your loved one dies, regardless of whether IHT is likely to be due.
Even if you don’t need to pay IHT, you’ll have to complete form IHT205 to confirm:
- The estate’s value is below the £325,000 threshold
- The estate’s value is under £650,000 when a previously deceased spouse or civil partner passed the estate to the person who’s died
- The estate isn’t an ‘excepted estate’. That’s where there’s no IHT liability because the estate is worth less than £1m and has been left to a surviving spouse or an organisation that’s exempt from IHT
Just complete brief details of the estate on IHT205 to tell HMRC that no IHT is payable.
If your loved one has left more than £325,000, Inheritance Tax will be payable. In this case, you’ll need to complete form IHT400. You must send this form back to HMRC within one year of the death. Note that interest is payable after six months, so you might want to act quickly.
Remember, if you have to pay Inheritance Tax, you’ll need an IHT reference number before sending your IHT400 off to HMRC. You can get this from the government website or by completing form IHT422 (application for an IHT reference).
Apply for this reference number at least three weeks before sending off your IHT400 from.
Is that it? Not quite.
There’s the IHT402. This allows you to claim any unused IHT threshold from a previously deceased spouse or civil partner. Then there’s form IHT435. This enables you to claim the residence nil rate band.
You should send your completed forms to:
HM Revenue and Customs
You’ll find a full list of the Inheritance Tax forms on the government website.
Remember, only a small percentage of estates are large enough to incur Inheritance Tax. So you might not need to worry about it. But if your loved one’s estate is affected and you’re struggling under the administrative burden at a difficult time, it might be wise to instruct a solicitor.
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