In this article, we explain the different types of inheritance tax thresholds and who is responsible for paying this tax.

Nil Rate Band (NRB) – Up to £325,000

The main inheritance tax threshold to be aware of is the nil rate band (NRB) which means that any assets up to £325,000 are tax-free. Net assets beyond this value are subject to 40% inheritance tax.

Example: If the total net estate is valued at £600,000, the first £325,000 is tax-free and the remaining £275,000 is subject to 40% inheritance tax, with an amount due of £110,000.

Residence Nil Rate Band (RNRB)

If the deceased has passed on their primary residence to their children, this offers an additional £175,000 which is tax free.

When combined with the nil rate band, it means that the tax free threshold increases to £500,000 (assuming the estate is worth less than £2 million).

The net value of the estate is calculated by adding together all of the assets in the estate and deducting any liabilities that are owed.

Example: The deceased has left an estate which consists of £200,000 in cash and a property which is their primary residence to their children of £400,000. The total estate is £600,000.

With a combined threshold of £500,000 of the nil rate band and residence nil rate band, there is £100,000 which is taxable at 40%, making the tax to pay £40,000.

Allowances transferred to spouses

Each individual has an allowance of £500,000 (made up of the nil rate band at £325,000 and residence nil rate band at £175,000). When one spouse dies, this can be transferred to the other, meaning the tax threshold doubles to £1 million.

Example: The husband of the family has died, and a few years later his spouse passes away. They each had an allowance of £500,000, totalling £1,000,000. If the estate is worth £1,000,000 or less and they have left the property in the estate to their children, then no inheritance tax is due. 

Who pays the inheritance tax bill and when is it due?

The inheritance tax bill is paid by the deceased person’s estate, before any monies are distributed to any beneficiaries. This is the responsibility of the executor or the administrator.

The inheritance tax bill (IHT) is due 6 months after the date of the person’s death. If this is not done, HMRC may start charging interest. It may also be possible to pay the tax due by instalments over the course of 10 years.

Either the full IHT liability or the first instalment must be paid before probate is granted. However, you cannot sell or liquidate any assets in the estate until this is done. As obtaining the grant of probate can often take 12 months or longer it can be difficult for executors to raise sufficient funds to pay the tax.

What other expenses come out of the estate?

The idea is that beneficiaries do not pay the inheritance tax directly, but rather it comes out of the estate. Also coming out of the estate should be costs such as:

• Legal and accounting fees
• Funeral and burial costs
• Ongoing costs – mortgage payments, car loans
• Debt – credit card balances, any outstanding loans

Does a spouse pay inheritance tax?

No, a spouse or civil partner does not pay inheritance tax. All the assets are transferred to a spouse when their partner dies, but there are no tax requirements.

Provira offers loans to executors to enable them to pay the Inheritance Tax, obtain probate and to complete the administration of the estate.