Understanding the Inheritance Tax: How and Where it Fits Into ProbateTweet
After a death occurs, arrangements must be made by family or the executor of estate for the individual who has passed away. One of the first steps made within this process is to define what the estate is worth from a monetary standpoint. This must be done even before a Grant of Representation is given. Once it has occurred, an inheritance tax may or may not be assigned, based on the value given to the estate. It is important to calculate values correctly, and to follow all rules set out by inheritance tax laws.
Assigning a Value to the Estate
Perhaps the most important part of probate and estate management, assigning a value to the estate itself requires a bit of mathematical fortitude and an understanding of what value really means. Most of the United Kingdom assigns guidelines to this process, each of which can be used to determine the actual value of the estate.
It’s highly recommended that the average individual seek legal assistance with this step, as it can be incredibly complex. A full list of items to be included in the valuation can be found at HM Revenue’s website. In general, anything with value must be included within the estate itself.
Determining Your Nil Rate Band
Each and every person in the United Kingdom is allowed a certain amount per year to claim as a reduction against Inheritance Tax.This is called the Nil Rate Band, and differs depending on which year it is being calculated for. From 2008 through 2009, the Nil Rate Band was £312,000. Each year since then, the rate has been calculated at £325,000 or higher. Because Nil Rate Bands can change each year, it is often recommended that you contact HM Revenue to ensure that you have an accurate number. CLS have a useful matrix outlining these bands.
Other Reductions Against Valuation
Debts against the state do not detract from the full value. Certain gifts may be removed from the valuation, including property signed over or given to someone else in which the deceased still lived or had an interest in. The following may also impact valuation:
● Spouse or civil partner gifts
● Charitable donations
● Gifts given over seven years ago
● Small unlimited gifts up to £250, given to individuals
● Up to £3,000 per year, if it was given as a gift
● Wedding gifts
● Certain exemptions under Business, Woodland, Heritage and Farm Relief
Filling Out Inheritance Tax Forms
It’s important that you understand that you must fill out inheritance tax forms, regardless if your valuation points to needing to pay the tax or not. These forms can be downloaded from the HM website’s Inheritance Tax and Probate forms page. These forms must be submitted before a Grant of Representation can be given, and before true Probate can begin.
When you Owe Inheritance Tax
When your valuation shows that you owe Inheritance Tax, you will need to pay the tax in full before any processes can continue. Inheritance Tax must be paid before six months to the day from when the deceased passed away. Because probate and even valuation can take some time, it’s advisable that you begin with a valuation as quickly as possible in situations where an executor or will hasn’t been specified.
Some individuals can’t afford inheritance tax, especially if a valuation has included physical items like housing or vehicles. It isn’t always reasonable to sell these items off quickly, so HMRC has created allowances for extension. It is possible to have the Inheritance Tax split up into equal payments over the period of 10 years if requirements are met. If you are unsure of whether you are eligible for the payment plan, you should contact either HMRC or The Co-Operative Legal Services for guidance.
From there, you will need to apply for an Inheritance Tax reference number; this number is used to make your payment. It isn’t possible to make payment until you have this number in your possession. HMRC provides two ways to apply for your reference number; you can apply for an Inheritance Tax number online or by post, ensuring that you have easy access to the application at all times. You will need personal information from the deceased in order to apply, including:
● Name and address
● National Insurance Number
● Birth and death dates
If you do not owe the Inheritance Tax, you should not apply for a reference number as you won’t require one.
Paying the Inheritance Tax
When you receive your reference number, you may then make a payment by post, through an online website, or over the telephone. However, you will also receive a payment slip with your reference number, and this slip must be sent in with your payment via post. It’s vital that you understand that failing to use the payment slip can result in lost or delayed payments. This can take a very long time to sort out, and can cause long delays during the probate process.
From there, you will need to fill out two forms. These forms must be sent in, and include the IHT400 Inheritance Tax Account form and the IHT421 Probate Summary. You can pay in a variety of ways:
● Through your bank account, as you would a bill
● By credit card over the telephone or through post
● Depending on the amount, through the Faster Payments banking service for same-day payments
About the Faster Payments Service
While it is possible to pay via the Faster Payments service, the limits for sending payments under this scheme vary widely depending on what bank you work with in the United Kingdom. A full list of limitations and information can be found on the Payments Council website. If you are paying in amounts greater than these limitations, you have two options available to you. You may split payments up into multiple days, or you may choose to pay part of your Inheritance Tax via the Faster Payments service and the other portion via post, online payment service, or telephone.