Taking on the role of executor means accepting real responsibility, and nowhere is that clearer than in relation to tax. Probate and inheritance tax is a subject many people worry about, and what executors need to know can feel daunting, partly because the rules seem complicated and partly because an executor can be held personally responsible if they get it wrong. In this article, ‘Probate and inheritance tax: what executors need to know’, we set out what executors need to understand, namely when inheritance tax is due, how it is reported and paid, and where the pitfalls lie.
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How Do Probate And Inheritance Tax Fit Together?
The two are closely linked in practice. Before a grant of representation can be obtained, the estate must be valued and reported to HM Revenue and Customs, and any inheritance tax that is due usually has to be dealt with as part of that process. In many cases, tax must be paid before the grant is issued, which can create a practical difficulty, since the executors may not yet have access to the estate’s funds.
Understanding this sequence early helps executors plan. Inheritance tax is not something to be considered at the end of the administration; it sits near the beginning and affects the timing of everything that follows.
When Is Inheritance Tax Payable?
Inheritance tax is charged on the value of an estate above a threshold known as the nil rate band, currently £325,000. The value above that threshold is generally taxed at 40%. There is an additional allowance, the residence nil rate band, currently up to £175,000, which may be available where a home is passed to direct descendants, such as children or grandchildren.
Two features of the system are worth emphasising because they reduce the tax substantially in many estates. Anything left to a surviving spouse or civil partner is normally exempt, as are gifts to charities. In addition, where the first spouse or civil partner to die did not use all of their allowances, the unused portion can often be transferred to the survivor, which can mean a couple’s estate benefiting from a considerably higher combined threshold. These figures are set by the government and are subject to change, so it is sensible to confirm the current position.
What Has To Be Reported, And When?
Every estate has to be considered for inheritance tax, but not every estate has to submit a full account. Many smaller estates, and many where everything passes to a surviving spouse or to charity, qualify as excepted estates with simpler reporting requirements. Larger or more complex estates require a full inheritance tax account to be completed and submitted to HM Revenue and Customs.
Inheritance tax is due for payment by the end of the sixth month after the month of death. If it is not paid by then, HM Revenue and Customs charges interest on the outstanding amount, which continues to accrue until the tax is paid. This deadline can arrive quickly while an estate is still being gathered together, so it needs to be kept firmly in mind from the start.
How Is The Tax Paid Before The Grant Is Issued?
The requirement to pay tax before obtaining the grant, when the estate’s money may not yet be accessible, is a common source of anxiety, but there are ways around it. Banks and building societies will often release funds directly to HM Revenue and Customs from the deceased’s accounts for this purpose under a direct payment scheme. Where the estate includes property or certain other assets, it may be possible to pay the tax attributable to those assets in annual instalments over a number of years, rather than all at once.
Navigating these options correctly can ease the pressure considerably, and it is one of the areas where experienced help is particularly valuable.
What Reliefs And Exemptions Might Apply?
Beyond the main allowances, there are reliefs designed for particular types of assets. Business property and agricultural property may qualify for relief that reduces or removes the tax on them, subject to conditions. Gifts made in the years before death, charitable legacies, and certain other transfers each have their own treatment.
Claiming the right reliefs and exemptions can make a significant difference to the tax due, but they must be claimed properly and supported by the correct evidence. This is rarely an area to attempt unaided where substantial sums are involved.
Why Are Executors Personally At Risk?
The point that surprises many executors is that they are personally responsible for reporting and paying inheritance tax correctly. If the estate is undervalued, if tax is underpaid, or if the estate is distributed to the beneficiaries before the tax position is properly resolved, HM Revenue and Customs can pursue the executor. An executor who has already paid the estate out to the beneficiaries may then have to make good the shortfall.
This is precisely why many people prefer to instruct a solicitor. It is not simply about completing forms; it is about carrying the responsibility with confidence that it has been discharged correctly.
How Can Bartletts Solicitors Help?
Our wills and probate team deals with the tax aspects of estates regularly. We can value the estate, determine whether it is an excepted estate or requires a full account, complete and submit the necessary forms, advise on reliefs and exemptions, and arrange for the tax to be paid in the most sensible way, including by instalments where that is appropriate. We also keep an eye on the deadlines so that interest and penalties are avoided.
To speak to our experts please call us free of charge on 0800 988 3674 or Make A Free Online Enquiry.
