Do beneficiaries pay Inheritance Tax in the UK?

• Beneficiaries don’t usually pay Inheritance Tax. It’s normally paid by the executor from the estate before anyone receives their share of the inheritance.
• Inheritance Tax is worked out on the value of the estate as a whole, not on each beneficiary’s share, although there are some situations where a beneficiary can become personally liable for Inheritance Tax.
• If Inheritance Tax and other estate costs are holding up your inheritance, Provira’s Inheritance Advance can give you early access to part of what you’re due.

Most beneficiaries in the UK do not pay Inheritance Tax out of their own pocket. The tax is calculated based on the net value of the estate as a whole and is normally paid by the executor or administrator before anyone receives what they’ve been left.

There are exceptions, though. In a small number of cases, a beneficiary can become personally responsible for an Inheritance Tax bill.

If tax, legal fees or other estate costs are holding up your Inheritance, Provira’sInheritance Advance can give you access to up to 50% of what you’re due to inherit, often within days, before the estate has finished being administered.

Get in touch with the team to apply today.

How is Inheritance Tax paid from an estate?

Inheritance Tax is normally paid directly from the estate, rather than from a beneficiary’s own money. The executor (or administrator if there’s no will) is responsible for working out what tax is owed and arranging payment to HMRC. 

At least some of the Inheritance Tax will usually need to be paid before probate can be granted. Money held in the deceased person’s bank accounts can sometimes be used to pay HMRC directly. Certain assets, including some property, can also qualify for payment by instalments.

Importantly, beneficiaries aren’t usually expected to find the money themselves.

How does Inheritance Tax affect what beneficiaries actually receive?

Inheritance Tax can reduce the amount beneficiaries receive because it’s paid from the estate before the inheritance is distributed.

How much of a difference it makes depends on what type of beneficiary you are.

In some cases, a will specifies a set amount for someone to inherit. This is known as a pecuniary legacy, and the person receiving it is sometimes referred to as a pecuniary or legacy beneficiary. These fixed gifts are generally paid before the remaining estate is divided between the residuary beneficiaries.

In many other cases, beneficiaries inherit a share of whatever is left after the estate’s debts, tax and expenses have been paid. These are called residuary beneficiaries.

Here’s an example: say an estate is worth £900,000 after debts and £500,000 is covered by the available tax-free allowances. If the remaining £400,000 were taxed at the standard 40% rate, that would leave an Inheritance Tax bill of £160,000.

If three residuary beneficiaries were splitting the remaining estate equally, they would each receive a third of £740,000 rather than a third of the original £900,000.

Someone left a fixed sum in a will is in a different position. If the will leaves you £20,000, for example, that legacy will usually be paid before the estate is divided between the residuary beneficiaries.

Our guide to what beneficiaries are entitled to explains the different types of beneficiary in more detail.

When might a beneficiary become personally liable for Inheritance Tax?

A beneficiary can become personally liable for Inheritance Tax in some circumstances, most commonly where they received certain lifetime gifts from the person who died.

If the person who died gave you a gift withinseven years of their death, there are circumstances where you, as the recipient, can become liable for tax on that gift.

Exactly what happens depends on when the gift was made, how much it was worth and what other gifts the person made. If HMRC says you may be personally liable, it’s worth getting tax or legal advice.

A beneficiary could also run into problems if an executor distributes the estate too early and then finds out there isn’t enough money left to pay its debts or taxes. They may then try to recover some of the money already distributed.

This is one reason executors can be cautious about paying beneficiaries before they’re confident all of the estate’s debts have been dealt with.

Other taxes beneficiaries may need to consider

Even if you don’t personally pay Inheritance Tax, you may still be liable for Capital Gains Tax or Income Tax, depending on what you’ve inherited.

If you inherit shares, property or another asset and its value rises before you sell it, you could have Capital Gains Tax to pay on the increase in value since the date of death. 

You aren’t generally paying Capital Gains Tax on the value you originally inherited.Our guide on inheriting shares looks at how this works for investments in more detail.

Income Tax can also apply.

Income generated by estate assets while the estate is being administered is dealt with by the executors. Once money or an income-producing asset has passed to you, you may then have your own Income Tax position to consider.

ISAs have their own rules if you’re due to inherit money or investments held in one.

What happens if the estate can’t afford the tax?

If an estate doesn’t have enough cash available to pay its Inheritance Tax bill, the executor will need to find another way to fund the payment.

Imagine someone leaves behind a £700,000 house and £10,000 in savings. On paper, that’s a valuable estate. But if there’s an Inheritance Tax bill to pay, there may be nowhere near enough cash sitting in the bank to cover it.

The executor then has to work out how to raise the money. That can mean using other estate funds, looking at payment options or selling assets like property. The problem is that selling a house takes time, and the executor may also need probate to be granted before they can sell.

We’ve covered what happens when an estate can’t afford its tax bill in more detail here.

If you’re the executor trying to find the money to pay the estate’s bills, ourEstate Advance can give executors access to up to 50% of the estate’s net value within days. 

We only charge simple interest, not compound interest, and applications can often be approved within days.

Get in touch with Provira to apply.

How Provira can help

Provira’sInheritance Advance can give you access to up to 50% of your inheritance before the estate is ready to pay you. Depending on the estate, this can be available before or after probate, Confirmation or Letters of Administration have been granted.

There are no monthly repayments, no personal guarantees and no charge over your own home. 

We assess applications against what you’re due to inherit rather than your income or credit history. The advance is then repaid from your inheritance when it comes through, with no early repayment fees if the estate settles sooner than expected.

Before you decide anything, our team is on hand to explain how much you could access, what the advance would cost and how repayment from your inheritance works.

Want to find out more? Get in touch with Provira today.