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HMRC inheritance tax guide

What is inheritance tax?

Inherited taxes are the type of taxes that someone needs to pay on money or property they have taken over after the death of the previous holder. HMRC 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. If the estate’s value is above the threshold limit people need to pay HMRC Inheritance Tax.

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Your assets could include:

  • Cash in the bank
  • Investments
  • Any property, land or businesses you own
  • Vehicles
  • Furniture
  • Shares
  • Trusts
  • Pay-outs from life insurance policies
  • Pensions
  • Personal items
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In some special cases you’ll have the provision to avoid paying Inheritance Tax, like:

  • In case the price of your estate is less than the £325,000 threshold
  • If in any case you leave all above the £325,000 threshold to your husband/wife, civil partner. The same rule is also applicable while you made a donation to a charity or a public nonprofessional sports club.

When the value of the estate is less than the threshold you still require to file a report to HMRC.

Cases when your threshold can be increased:

Your threshold can rise up to £5,00,000 if you give away your home to your children or grandchildren. Same law is applicable for adopted, foster or stepchildren.

Whether you’re in a civil partner relationship or married and your estate is worth less than your threshold, any unutilized threshold can be added to your partner’s threshold once you die.

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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.
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HMRC inheritance tax transferable nil rate band

For the tax year 2023-24, 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. 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.

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Inheritance tax exemptions

Individuals who are involved in dealing with uncertain activities like armed forces, firefighters, police etc. are exempt from paying inheritance tax in case they die in active service. Such tax exemptions are also valid for a person who got injured during work and died later because of the injury, even if they're no longer on active service.

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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
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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 v
Glasgow G70 5WY
United Kingdom

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HMRC inheritance tax advisors

dns accountants is a trusted brand and has years of knowledge in the accounting and taxation domain. The firm has been helping individuals with HMRC inheritance tax and other taxation related queries. The firm focuses a lot on customer service & believes in delivering unmatched client service and offers:

  • services at a nominal rate
  • best-in-class accounting and tax planning services
  • HMRC inheritance tax planning and taxation advice

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

  • Inheritance tax (IHT) advice and family wealth succession
  • Calculations and predictions of Inheritance Tax (IHT)
  • Guidance on Capital gains tax liabilities
  • Guidance on transfer of gifts with pre-owned assets
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