Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of Inheritance Tax payable is 40% on death and 20% on lifetime gifts. IHT is payable at a reduced rate on some assets if an individual leaves 10% or more of the ‘net value’ to charity of their estate.
There is a nil-rate band, currently £325,000 below which no Inheritance Tax is payable. In addition, there is an IHT residence nil-rate band (RNRB) which relates to a main residence passed down to a direct descendent such as children or grandchildren. The RNRB of £175,000 (where available) is additional to the £325,000 Inheritance Tax nil-rate band.
Funds from the deceased estate are usually used to pay IHT. If there is a will, it is usually the executor who deals with paying any IHT due to HMRC. IHT can be paid from funds within the estate, or from money raised from the sale of the assets. Payment of any IHT due is often made using the Direct Payment Scheme (DPS) whereby some or all of the IHT is paid from the deceased person’s accounts directly to HMRC. The deceased may also have used a life insurance policy to fund the payment of some / all the IHT due.
Once the IHT and any outstanding debts are paid, the executor or administrator can distribute what remains of the estate. The beneficiaries of the will do not normally need to pay IHT on their inheritance, but there are exceptions.