Tax When Someone Dies: Inheritance Tax and Probate
When someone passes away, there are tax and legal processes that must be followed. Inheritance Tax (IHT) is often the biggest concern for families, but it doesn’t affect every estate. Here’s what you need to know.
Inheritance Tax (IHT) Thresholds
IHT is charged on the value of a deceased person’s estate above certain thresholds:
Nil-Rate Band — £325,000
The first £325,000 of the estate is taxed at 0%. This is the nil-rate band. If the estate is worth less than this amount, no IHT is due.
Residence Nil-Rate Band — £175,000
If the deceased’s main home is passed to a direct descendant (child or grandchild), an additional £175,000 nil-rate band applies. This means the total tax-free threshold can be up to £500,000 per person.
Married Couples and Civil Partners
If the deceased was married or in a civil partnership and their partner’s nil-rate band wasn’t fully used, the unused portion can be transferred. This can increase the tax-free threshold to up to £1,000,000.
IHT Rates
Once the estate exceeds the nil-rate bands, IHT is charged at:
- 40% on the value above the threshold
- This is reduced to 36% if at least 10% of the estate is left to charity
IHT Return and Payment
An IHT return (form IHT400) must be submitted to HMRC within 12 months of the date of death. This return details the value of the estate, any deductions, and the IHT due.
How to Pay IHT
IHT can be paid in several ways:
- From the estate — using funds held in bank accounts or by selling assets
- Life insurance in trust — if a life insurance policy was written in trust, the payout goes directly to beneficiaries and doesn’t form part of the estate
- Instalments on property — if the estate includes property and there aren’t enough liquid assets, IHT on property can be paid in up to 10 annual instalments
What’s Exempt From IHT
Certain transfers are exempt from IHT:
- Spouse or civil partner — transfers between spouses or civil partners are fully exempt (if both are UK domiciled)
- Charity — gifts to registered charities are exempt
- Gifts more than 7 years ago — gifts made more than 7 years before death are fully exempt from IHT
- Gifts within 3 years of death — taxed at a reduced rate on a sliding scale (called taper relief)
Probate: Grant of Probate and Letters of Administration
Probate is the legal process of dealing with someone’s estate after they die.
If there’s a will
The executors named in the will can apply for a Grant of Probate. This document gives them the legal authority to deal with the estate — closing bank accounts, selling property, and distributing assets.
If there’s no will
When someone dies without a will (intestate), someone can apply for Letters of Administration. The rules of intestacy determine who inherits the estate, typically starting with the spouse or civil partner, then children, then parents, then siblings.
Timeline: What Happens After Death
- Register the death — register with the local registrar within 5 days (or 8 days in Scotland)
- Apply for probate — once you have the death certificate, apply for Grant of Probate or Letters of Administration
- Valuing the estate — gather details of all assets, debts, and liabilities
- Submit IHT return — within 12 months of death
- Pay IHT — either from the estate or via instalments
- Distribute the estate — once IHT is paid and probate is granted, the executor can distribute assets to beneficiaries
Key Points to Remember
- IHT doesn’t apply to every estate — it’s only charged on value above the thresholds
- Proper estate planning (trusts, life insurance, gifts) can reduce or eliminate IHT
- The 12-month deadline for the IHT return is strict — penalties apply for late submission
- Probate is necessary to legally handle the estate, even if the estate is small
If you’re dealing with a deceased person’s estate, consider getting professional advice from a solicitor or tax adviser to ensure everything is handled correctly.