How Do I Pay Inheritance Taxes to HMRC?

INTRODUCTION

Before we start, we recommend you consult two crucial articles in our resource library to provide you with the necessary background and context:

• "What Is Inheritance Tax?": In this article, we provide a comprehensive review of I IHT definitions, rates, thresholds, and any relevant exemptions.

• "How Can I Apply for Probate?": This article explains your fiduciary responsibilities as Executor when handling the Estate's legal and financial affairs and offers a step-by-step explanation of the Probate process.

In this article, we'll guide you through the actual process of IHT payments.

PAYING INHERITANCE TAX: THE ROLE OF EXECUTOR

• The individual appointed in the Will as the Executor bears responsibility for paying any Inheritance Tax (IHT) owed to HMRC.

• IHT payments are made using funds from the Estate.

• The appointed Executor should take the time to familiarise themselves with this critical role and its fiduciary responsibilities. A central pillar of this role is determining the Estate's total value and accurately assessing any IHT liabilities.

• You may also want to refer to the article: "How Can I Apply for Probate?" for a step-by-step walkthrough of the role of Executor.

BENEFICIARIES AND IHT

• Since the Executor already manages IHT payments from the Estate's funds, Beneficiaries typically do not directly pay IHT on their inheritance.

• Likewise, Beneficiaries do not pay IHT payments on gifts. Executors are responsible for managing IHT payments for gifts exceeding £325,000 made to Beneficiaries within seven years of the Testator's death.

• However, Beneficiaries are still liable for other related taxes, such as rental income on a property they inherit that generates rental income.

PAYING IHT: VALUE THE ESTATE

A central pillar of the probate application is determining the Estate's total value and assessing any inheritance tax liabilities. This involves a number of essential actions:

• Compile a detailed list of the deceased person's assets and liabilities. This should take into account financial assets, stocks and shares, personal belongings, life insurance payouts, property, and any debts. You may need to contact financial institutions to gain accurate values. Ensure the list includes possessions, stocks and shares, life insurance payouts, and any debts.

• If the deceased individual held any assets jointly with somebody else, these need to be included on your list. In these cases, calculate their market sale value and divide them by two to determine the deceased individual's share

• Don't forget to consider any gifts made by the deceased individual. You can go back seven years before death. Some items are more challenging to value than others. For instance, while monetary gifts are pretty straightforward, gifted possessions need an estimate of their market value.

To ensure accuracy, obtaining professional evaluations for items that may be more difficult to calculate might be wise.

PAYING IHT: FILL OUT THE FORMS

The form you will use to arrange inheritance tax will depend on the value of the Estate.

• For Larger Estates: If the Estate's total value exceeds the £325,000 threshold (including gifts given during the last seven years before death), you must complete and submit Form 1HT400 to pay the inheritance tax.

• For Smaller Estates: For Estates below the £325,000 threshold, inheritance tax does not typically need to be paid. However, you must still complete Form IHT205 to formally declare that no inheritance tax is payable.

Once you've submitted the relevant inheritance tax form, you should allow at least 20 business days before proceeding to apply for probate. This gives HMRC enough time to process the documents and issue any necessary acknowledgement or clearance.

DON'T FORGET YOUR BROADER ROLE AS EXECUTOR IN THE PROBATE PROCESS

Don't forget that, as the Executor responsible for IHT payments, you should recognise this is just one small element of the legal and financial steps involved in managing and distributing the Estate's assets as outlined in a Will, known as "Probate."

To gain a comprehensive understanding of each step in the Probate process and ensure you carry out your role as Executor efficiently, we recommend you read our detailed article, "How Can I Apply for Probate?" for a step-by-step walkthrough. 

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