Today’s Blog is on a subject matter that many of you will not have at the front of your minds, when thinking about tax. In a typical UK household of two adults, two kids and a mortgage, with at least one adult working, concerns about leaving an estate that may attract IHT and the need to go through probate, does not feature in day-to-day thinking.
This is a mistake, as at some point, perhaps several decades in the future, there is a significant possibility that with property prices still rising strongly, the value of your assets will exceed the IHT threshold of £325,000 which Rachel Reeves has already stated will not be raised during the life of this Parliament.
Inheritance Tax – a brief guide
Only a modest percentage of estates are large enough to incur IHT, but it’s important not to forget to take it into account when making your will. If you pass away and your estate is valued at over £325,000, unless you’re married, IHT at the rate of 40% is payable on the value of the estate (property, money, shares etc) above the £325,00 threshold, with the sole exception of your home, which if bequeathed to your children, effectively raises the threshold to £500,000.
The good news is, that it may be possible to reduce or even avoid IHT in a number of ways, on top of the £325k tax-free allowance; these include:-
- You can gift any amount during your lifetime, tax-free and without it counting towards your estate providing that you live for 7 years following the gift. If you die during the 7-year period, there will be IHT to pay, but this may be mitigated by taper relief.
- You can gift someone up to £3,000 per tax year without it being subject to IHT (known as your annual exemption).
- You can also make unlimited small gifts of up to £250 per person per tax year, as long as you haven’t used your £3,000 annual exemption on the same person.
- Wedding gifts are also exempt
- You can transfer any amount into a family trust. This is a complex area and you should seek professional advice first, but some are liable to tax, such as discretionary trusts. These are liable to the reduced IHT rate of 20% on any amount above the settlor’s nil rate band.
- There are some other reliefs, such as Business Relief, which allow some assets to be passed on free of Inheritance Tax or with a reduced bill
- If you pay into a pension, this is currently exempt from IHT, but from April 2027, this option will no longer be available.
Probate- the basics
In a nutshell, probate is the process of dealing with someone’s estate after they’ve died. This generally involves notifying banks and providers of the death, applying for grant of probate and paying inheritance tax, and gathering and distributing the deceased’s assets in line with their will.
Whether probate is needed depends on what ‘assets’ were owned by the person who died. Examples of assets include bank accounts, property and shares. It’s likely you’ll need probate if the person who died had any of these assets:
- property owned in their sole name or property owned as tenants in common, such as with a married partner
- bank or building society accounts in their sole name worth over £30,000
- shares or investments worth over £10,000 Premium Bonds or other National Savings & Investments (NS&l) products worth over £5,000
- a pension that will pay a lump sum to the estate
- a life insurance policy that will pay a lump sum to the estate
- business assets or interests
How to apply for a Grant of Probate
To apply for a Grant of Probate, you need to first register the death, then estimate the value of the estate, and determine if inheritance tax is due. If inheritance tax is owed, you’ll need to pay it and obtain a code from HMRC. You can then apply for probate online or by post, either yourself or through a solicitor. The process can take several weeks to months, depending on the complexity of the estate.
The Government has published a useful guide on making an application for a Grant of Probate, with the fee being £300 for estates worth over £5,000. The document is vital to obtain because banks, insurance and pension companies will not release any funds without one. So go to: https://www.gov.uk/applying-for-probate/apply-for-probate
If there is IHT to pay you have the legal right to ask the financial institution concerned to deduct the IHT payable, before passing on the funds.
Do I need an executor?
Yes, if you have a will, you need to appoint at least one executor. Age UK says an executor is essential to manage your estate after your death, ensuring your wishes are carried out. Without an executor, there will be delays and potential protracted legal issues in managing your assets.
Put simply, an executor is the legally responsible person to carrying out the instructions in your will and handling your estate. Anyone who makes a will must name 1 or more executors, and can appoint up to 4 executors so that the responsibility is shared. If there’s more than 1 executor, all decisions must then be made jointly. Most often, 2 executors are appointed, just in case one dies or is otherwise unable to carry out their duties. A family member and your solicitor is the most common arrangement.
The charity Age UK has made available, a very useful guide in plain English and provide a free advice line at: https://www.ageuk.org.uk/information-advice/money-legal/legal-issues/what-do-executors-do/ If, you’re concerned about not making mistakes or are not sure of what to do, contact them, they are lovely people.
Accountant’s view
In today’s Blog, I have attempted to explain how IHT works and what to do about Grants of Probate. It is not meant to be all singing and dancing but should arm you with sufficient knowledge to take the next steps at a very difficult and stressful time in your life.
