How does Inheritance Tax work when someone dies?

by Nigel Merchant, Kings Court Trust

Nigel Merchant, a Regional Probate Consultant at probate specialists Kings Court Trust, has visited hundreds of bereaved families to discuss, and quote a fixed price for, the administration of their deceased loved one’s estate. One of the points that customers enquire about again and again is the question of Inheritance Tax (IHT):

How is IHT paid? Where does the money come from with which to pay the bill?

The answer is that, if there is any IHT to pay, it will be the estate that pays it.

Here Nigel answers your frequently asked questions on paying Inheritance Tax when someone dies:

Is Inheritance Tax payable on the estate?

Every estate has a tax-free sum (known as the 'nil-rate band') of £325,000. 

This means that if the estate, after all the debts, mortgages, any other liabilities and bequests to charity and/or spouse are taken into account is worth £325,000 or less, there will be no Inheritance Tax to pay. 

If, after these deductions are taken into account, the deceased's estate is worth more than £325,000, then IHT is payable at 40 per cent of everything over the tax-free sum. 

For example:

After all the deductions mentioned above, the deceased's estate is worth £330,000.

Tax would be payable at 40% of the difference between the tax-free sum of £325,000 and £330,000, which is 40% of £5,000, i.e. £2,000.

How to make the most of a spouse's tax-free sum

It is possible to use the pre-deceased spouse’s (or civil partner's) IHT tax-free sum, if they didn’t use it all themselves. 

For example:

If your Dad dies with an estate after deductions of £225,000 and leaves it all to his children, when Mum dies her estate will have its own tax-free sum (£325,000) AND an extra £100,000 left over from Dad’s estate (assuming Dad’s tax free sum was £325,000 when he died), giving a total tax-free sum after all deductions of £425,000. 

Similarly, if Dad leaves his entire estate to Mum (there is no Inheritance Tax payable between married couples), her estate will have both tax-free sums, a total of £650,000.

If Dad had left the £225,000 to the children, there would be £100,000 of his tax-free sum left over, as we saw in the example above.

But if the family and everyone else concerned agreed, it would be possible to vary the terms of Dad’s Will (within 2 years of his death) to leave more of his estate to Mum so that, when she died, her estate would benefit from a higher tax-free sum. 

Kings Court Trust can prepare the necessary paperwork to do this. Call them on 0800 975 7877 to discuss further and get free advice.


This article has been reproduced from Kings Court Trust's website.
Kings Court Trust are specialists in probate and estate administration at a fixed price. They are authors of Lawpack's DIY Probate Kit and provide fixed-price Probate Assist Services.


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Published on: August 30, 2012

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