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How and when is inheritance tax paid?

Esther Shaw / 03 November 2015

When do you have to pay inheritance tax? How is it collected? Do you have to declare your inheritance? Read our guide to paying your inheritance tax bill.

Couple working out their inheritance tax bill
Raising the money to pay the inheritance tax bill may mean cashing in any savings accounts held by the deceased and potentially selling some of the assets in the estate

When someone dies, the administration of their estate will fall to the person – or people – who have been named as executors in the deceased’s Will. If the estate falls above a certain threshold, inheritance tax (IHT) will need to be paid.

The “estate” applies to everything of value that the deceased person owned, including their home, car, jewellery and other possessions, as well as their savings and investments.

If IHT is due, you will need to follow a set process to ensure the bill gets paid correctly – and on time.

What is inheritance tax?

What is the threshold?

IHT is only payable if a deceased person’s estate is worth more than the nil-rate band. At present, the threshold for IHT stands at £325,000 per person. The tax is set at 40% of any value over that threshold.

To work out how much IHT, if any, needs to be paid, you will need to add up the value of all of the assets left behind and then subtract any debts, bills and funeral expenses.

Also bear in mind that, occasionally, someone who has received a gift from the deceased within the last seven years of the deceased’s life may have to pay IHT. That said, this is not particularly common.

Read our tips for reducing inheritance tax liability.

Be aware of deadline for paying IHT

If IHT is due, this must be paid within six months of the end of the month in which the person died.

It is important to adhere to these deadlines, as if not, you could face penalties from HMRC. These will take the form of interest charges on the amount owing.

How to pay

Before you can pay your IHT bill, you will need to get a reference number from HMRC.

Once you have this, you can then proceed with payment.

Generally speaking, an IHT bill is paid from one of the deceased’s bank accounts, or from funds that the deceased holds with Government-backed National Savings & Investments.

To do this, you will need to obtain a “grant of representation” or “probate.” This will give you the legal right to access things like the person’s bank account – enabling you to pay the IHT bill.

That said, you can opt to make the payment from your own bank account or a joint account, and can then claim the back from the deceased’s estate.

What is probate?

Deferring payment of IHT

Raising the money to pay the bill may mean cashing in any savings accounts held by the deceased, and potentially also selling some of the assets in the estate.

If, however, there is no cash in the estate that you have inherited – meaning you cannot pay the tax – you can arrange to pay the tax in monthly instalments over 10 years. In this scenario, interest will be due on the outstanding tax.

Payments on account

If you don’t know exactly how much IHT is owed by the deceased person’s estate, you can make payments before finding out the precise figure. These are known as “payments on account.”

Confirm payment has been received

It is worth noting that HMRC will not send out individual receipts for each payment you make; they will only send a “clearance letter” once the entire IHT bill has been paid – along with any interest.

The best way to keep track of your payments is by keeping a close eye on your bank statements.

What happens if you die without leaving a Will?

IHT threshold set to increase

The current IHT threshold is set to increase following changes announced by Chancellor George Osborne in the Summer Budget.

From April 2017, an additional allowance is being phased in which will see the threshold increase to £500,000.

This will mean that in a few years’ time, married couples and those in civil partnerships will be able to leave an estate worth up to £1 million to children or grandchildren completely free from IHT.

Is your Will watertight? Read more about how it could be challenged.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.