An overview of Probate and Inheritance Tax

Probate and inheritance tax can be a complicated area to navigate because of the numerous rules, regulations and inheritance tax exemptions and reliefs. Below we provide a very brief overview of probate and inheritance tax and provide some very good reasons why you should talk to inheritance tax solicitors to ensure you understand:

What Is Inheritance Tax?

Inheritance tax is a tax levied on the estate of someone who has died. The estate includes property, money and possessions, and the amount of tax due will depend on the total value of the estate.

What Is Probate?

Probate is the legal process of distributing a deceased person’s estate to their beneficiaries.

Probate and Inheritance Tax Advice Options

Probate and Inheritance Tax

Grant Of Probate / Letters of Administration

Grant of Probate and Letters of Administration are documents that provide the legal authority for either the executors or administrators to deal with the estate administration. The person (s) who are granted these documents are known as the Personal Representative (s).

Who Applies for Probate?

If you’re a named executor in the deceased person’s Will, then you need to apply for a Grant of Probate.

If there is no Will and you’re the closest living relative you need to apply for Letters of Administration to become the administrator of the estate. Only a relative can apply to be an Administrator and there is an order of priority of which relatives can apply starting with married or civil partners, children, grandchildren, parents, siblings ect.

What’s The Probate Process?

You first need to establish is probate required. If probate is required the correct application must be made either online or by post for either a Grant of Probate or Letters of Administration. Before making the application your need to estimate the estate’s value. This value needs to be included in the probate forms so it can be established if inheritance tax is due and if it is, the appropriate amount of inheritance tax will be calculated. The inheritance tax needs to be paid before the Grant of Probate or Letters of Administration are issued. The documents are usually processed and returned to the applicant within 16 weeks. Once received, it’s possible to legally administer the estate.

Please note: The Probate Registry is currently experiencing long delays and applications are taking much longer than 16 weeks to process.

Who Pays Inheritance Tax?

If the deceased person left their final wishes in a Will, then the executor of the estate is responsible for paying the inheritance tax. If there is no Will then the administrator of the estate makes the payment arrangements.

As Inheritance Tax needs to be paid before probate is granted many personal representatives need to make financial arrangements to cover costs until the estate is administered. HMRC will sometimes except deferred payments or payment instalments, or the alternative option is a probate loan or inheritance tax loan.

The recipients of any gifts made by the deceased within the last 7 years that are eligible for inheritance tax must pay the amount owed themselves.

The tax can be paid from the estate or from the money gained from the sale of assets. Any tax owed must be paid within 6 months of death, although there are certain allowances if probate property sales are involved.

How Is Inheritance Tax Calculated?

The total value of the estate is established in order to calculate the amount of inheritance tax payable. The total value of the estate includes everything the deceased owned including property and land, cash, shares, valuables such as jewellery, cars and paintings minus any debts owed.

The amount up to the set threshold, which changes over time but during 2022/23 was set at £325,000, is tax free. Usually all amounts over this are taxed at 40%.

A spouse or civil partner will qualify for the residence nil rate band (RNRB) and can pass on assets tax-free to their partners and the surviving partner can use any remaining threshold amount when they die.

There is is an additional inheritance tax allowance that applies to individuals who leave their main residence to their direct descendants (such as children or grandchildren) on their death. As of 2023, the allowance is £175,000 per person.

Any gifts made in the last 7 years could be liable for inheritance tax. Gifts made to charity are exempt from inheritance tax. Any annual gifts of £3000 are tax-free, and any regular gifts from any extra income to an ex-spouse or dependent or child in full-time education are also exempt.

There are numerous other possible inheritance tax exemptions and reliefs that may apply including business property relief and agricultural relief. Not understanding the exemptions can be a costly mistake which is why is always advisable to discuss inheritance tax with a probate solicitor.

Probate and Inheritance Tax: The Benefits of Professional Advice

The process of probate, including establishing the amount and making the payment of inheritance tax as well as making the probate application is lengthy and complicated and can be daunting.

While some estates are more straightforward to administer, others are complex and the amount of inheritance tax owed is often hard to calculate. In the interests of wealth preservation and compliance, paying the right amount of inheritance tax is important.

Furthermore, as the liability lies with the personal representatives and there are legal and financial consequences for getting things wrong, seeking professional advice for inheritance tax and probate matters could help you to avoid contentious probate claims and estate litigation.

HMRC Compliance

Specialist probate solicitors have the experience and legal knowledge to help with every aspect of estate administration. As well as supporting you through the process, your solicitor can handle any inheritance tax payment to HMRC to ensure efficiency and full compliance. The right amount of tax would be paid, at the right time, and any concerns you may have during the estate administration would be dealt with for total peace of mind and legal conformity.

Reduces the Risk Of Personal Liability

As executor or administrator of an estate, you are personally liable for any issues that arise or mistakes that are made, which can result in estate litigation. By using the services of a solicitor, he or she can take responsibility for estate administration, including making sure all beneficiaries are identified and checked before receiving their inheritance and handling any claims made against the estate from individuals who feel wrongly excluded by the final wishes in the Will.

Solicitors also have professional insurance, which means that in the unlikely event of things going wrong, you are protected.

Potential Tax Savings / Understanding Exemptions

A specialist solicitor will help you with the wealth preservation of the estate by reducing the amount of inheritance tax liable on the estate where possible. A professional will be aware of the inheritance tax exemptions that apply and can claim for any available reliefs such as taper relief and agricultural property relief as well as secure a tax refund if any assets are sold for less than the probate value.

By using a legal specialist potential issues such as distributing the estate too early and facing claims from someone who didn’t benefit from the Will, can be avoided. There are numerous risks involved in being a personal representative and without specialist probate knowledge the likelihood of mistakes is high particularly for large, high value and complicated estates.

Probate and Inheritance is Complex

Probate is time consuming and often complicated. There are lots of probate forms to fill in and it’s easy to make mistakes or miss deadlines, and the consequences can be serious and costly. Your solicitor will guide you through the process and provide help when needed, mediating between family members and handling third parties if disputes do arise to make it easier for you to find a resolution.

The Inheritance Tax Loan

The financial implications of probate and inheritance tax can be a daunting task, especially when it comes to securing the necessary funds to cover the expenses. Probate and inheritance tax loans are specifically designed to help you pay an inheritance tax bill. Often the probate process is stalled because the executors, administrators or beneficiaries are unable to find the funds to pay inheritance tax. A probate loan is a potential solution.

Probate loans are tailored to meet the needs of those who are dealing with the complexities of probate and inheritance tax allowing administrators or executors to get the IHT funds needed quickly and easily. Probate loans generally don’t require the same checks associated with a traditional loan such as credit checks and affordability checks and there are no monthly repayments. This is because the inheritance tax loan is secured by the probate estate and the loan and the associated interest will be paid once probate is complete and before the estate is distributed to beneficiaries.

The fact that inheritance tax needs to be paid before the Grant of Probate or Letters of Administration are issued can create real problems for those tasked with finalising the estate of the deceased so a probate loan can prove to be an invaluable solution which helps to speed up the probate process.

How We Can Help?

Our Network of probate and inheritance tax solicitors can help with every aspect of probate and inheritance tax to make the process more straightforward starting with a free twenty-minute probate and inheritance tax consultation.

Probate and Inheritance Tax: Common Questions

The regulations surrounding Inheritance Tax exemptions for couples can often be unclear. In the case of married or registered civil partners, they are exempt from paying Inheritance Tax on any assets that are left by their spouse. Additionally, when the second partner passes away, the Estate qualifies for what is known as a ‘married couple’s transferable allowance’. This means that the Estate can claim the combined sum of two single people’s allowance or up to £650,000, as long as none of the IHT threshold was previously utilized. The beneficiary who inherits the Estate will only be required to pay tax on anything exceeding this £650,000 limit. This additional transferable allowance is referred to as the Transferable Nil Rate Band (TNRB).

Cohabiting couples do not have a specific Inheritance Tax allowance or exemption. The matter can become complicated if the couple jointly owns assets, particularly property. In cases where both partners own all of the property as joint tenants and one partner leaves everything to the other in their Will, a 40% tax bill must be paid if the assets, including the property, exceed the single person Inheritance Tax threshold of £325,000. Following the partner’s death, the surviving partner would become the sole owner of the property. If there is no Will, the property can still be transferred to the surviving partner through the “right of survivorship,” and the same Inheritance Tax regulations would apply. However, without a Will, any family members of the deceased partner would have a right to claim their share of other assets left, and in such cases, the administrators would be liable for paying the tax bill.

Inheritance Tax is payable before Probate is granted and before the distribution of assets. The payment of the tax bill must also be made within six months of the person’s demise. If this deadline passes, HMRC will start charging interest and may impose penalties on the outstanding Inheritance Tax. The longer it takes for the IHT bill to be paid, the more interest is added. Currently, the interest rate for late payments is set at 3.75%, and the Estate will be refunded by HMRC if it has overpaid IHT once Probate has been granted.

Inheritance tax is payable on a property although there are inheritance tax reliefs and exemptions. In the case of married or registered civil partners, they are exempt from paying Inheritance Tax on any assets that are left by their spouse. The liability to pay tax on a house inherited by children or grandchildren depends on its value. If the value is below a certain threshold, they may not have to pay tax. If the house was the primary residence of the deceased and has been bequeathed to direct descendants, then they can benefit from an additional tax-free allowance of up to £175,000 per person, which is on top of the £325,000 single person Inheritance Tax threshold. This allowance is known as the “Residence Nil Rate Band” (RNRB) and can only be transferred to children and grandchildren. This implies that Inheritance Tax may not be owed on the first £500,000 of the Estate per individual. When the second parent dies, a different allowance for Inheritance Tax applies if the Estate passes to the surviving spouse. If the main property is left to direct descendants (or if they jointly own the property with their spouse), it is feasible to have up to £1 million in tax-free allowance (£325,000 per person nil rate band and £175,000 per person RNRB). However, the £175,000 RNRB allowance only applies to Estates worth less than £2 million. On Estates worth more than £2 million, the RNRB allowance will decrease by £1 for every £2 above £2 million that the deceased’s Estate is worth. If the property is bequeathed to Beneficiaries who are not direct descendants of the deceased, a tax bill of 40% will be imposed on anything above the £325,000 single person Inheritance Tax allowance.

Inheritance Tax and exemptions can be complicated. It’s worth taking professional advice to ensure that exemptions are fully utilised and that no IHT overpayments or underpayments are made. Start with a free consultation with a probate solicitor from The Probate Network.

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