What you need to know about – HMRC Inheritance Tax

Inheritance tax is the tax charged on the property, possessions, and money when a person dies. The Government evaluates the worth of the estate, and then reduces the debits from the estate value to arrive at the final inherited wealth. Assets may include:

• Cash at the bank Vehicles
• Life insurance policy payouts
• Investments
• Property or business owned by the person

No inheritance tax is due if:

• The estate value is below the threshold of £325,000
• The person leaves everything to their spouse / civil partner or a charity

If a person is in a civil partnership or is married, and the estate worth is less than £325,000, an individual can transfer any idle threshold to the partner. This can increase their threshold to £650,000. However, the estate will be obliged to pay 40% on everything above the £325,000 inheritance tax threshold when a person dies (or 36% if the person has left at least 10% to a charity)

Who pays inheritance tax to HMRC

• Funds from an individual’s estate are used to pay inheritance tax to HMRC. This is done by the executor or person responsible for the estate
• The beneficiaries (the people who inherit the estate) don’t usually pay tax on everything they inherit. There are some exceptions.
• People who receive gifts from the individual who dies, might have to pay Inheritance Tax, but only if they receive more than £325,000 and the individual dies within 7 years

HMRC INHERITANCE TAX TRANSFERABLE NIL RATE BAND

For the tax year 2016-17, each one is permitted to leave behind an estate valued upto £325,000 without their beneficiaries having to pay tax on it. This amount has been decided by the government and is known as the nil-rate band, because no inheritance tax is paid on this amount. Legitimately, the £325,000 limit has been ceased until at least 2020-21, although the extra main residence allowance will be brought in from 2017 onwards. Let’s assume that a person leaves behind a net asset worth of £500,000.

Particulars	Amount
Net asset worth	£500,000.00
Threshold limit	£325,000.00
Taxable Amount	£175,000.00
Tax @40%	£70,000.00

According to the above example, the net payable tax amount will be £70,000.00. The computation might change if at least 10% of the assets are left for charity.

Particulars	Amount
Net asset worth	£500,000.00
Threshold limit	£325,000.00
Taxable Amount	£175,000.00
Tax @36%	£63,000.00

When an individual dies, any assets left behind for the spouse or registered civil partner, provided the spouse is a UK-domicile, are exempt from inheritance tax. In addition to this, as mentioned earlier the partner’s inheritance tax allowance rises by the threshold amount, meaning a couple can together leave £650,000 tax-free. Let’s assume that Mr. and Mrs. Vaughan have total assets worth £800,000. If Mr. Vaughan dies first, and leaves £200,000 for the children, the outstanding £125,000 which is a part of the nil-rate allowance will pass on to Mrs. Vaughan, giving her a total allowance of £450,000.

Scenario 2: Mrs. Vaughan passes away and her total assets are worth £600,000. If the children did not use the full nil-rate allowance, they will owe 40% on everything above £450,000.

Exemptions from inheritance tax

Individuals involved in hazardous activities are exempt from giving inheritance tax. People that might be included under this category are firefighters, armed forces, paramedics, and police officers. The exemption might even come into play if a person was injured during active service.

HMRC INHERITANCE TAX FORMS

Individuals can send the Inheritance Tax forms when they apply for a grant of representation. This is officially permitted and it is the right to deal with the estate. The form used by an individual depends on whether inheritance tax is liable or not. An individual may be able to use the forms to:

• boost the threshold by transferring a spouse or civil partner’s threshold
• reduce the value of the estate by deducting anything on which Inheritance Tax is not paid

If there’s no Inheritance Tax payable; individuals can fill form IHT205. An individual can also fill this form if the entire Inheritance Tax threshold passes to:

• the civil partner or spouse of the person who has died
• a charity, with a charity reference number from (HMRC)

In Scotland, an individual can fill form C1 in its place and send it with either form C5 (SE) or form C5

If the person living abroad dies; fill form IHT207 instead of form IHT205, if the person who died:

• permanently lived abroad, and
• in cash or bank accounts had less than £150,000 in UK assets

In Scotland, fill in form C5 and form C1 instead

Deduct things on which tax is not paid

Use form IHT400 to deduct anything on which Inheritance Tax is not paid. This includes details of anything that’s exempt from Inheritance Tax because:

• it is passed to a civil partner or spouse
• is a gift on which inheritance tax is not paid
• it qualifies as a heritage asset – form IHT420
• it qualifies for business relief
• it qualifies for agricultural relief – form IHT414

HMRC INHERITANCE TAX ADDRESS

Online forms

• Firstly apply for a reference number for Inheritance Tax
• Application must be filed in 3 weeks prior to making the payment
• Online application is not accepted if reference number is for a trust

Post

• Follow the instructions on paying the Inheritance Tax bill by cheque.
• It takes a minimum of three (3) working days for the payment to reach HMRC

Send the cheque to:
HM Revenue and Customs
St Mungo’s Road, Cumbernauld
Glasgow G70 5WY
United Kingdom

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As per the inheritance tax limit passed in the budget, inheritance tax allows citizens to pass on more to the family without being taxed. DNS Accountants help with:

• Advice on Inheritance Tax (IHT) and family wealth succession
• Calculations and predictions of Inheritance Tax (IHT)
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Other services

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