Government figures show that in the 2020/21 tax year, 3.73% of UK deaths resulted in an Inheritance Tax (IHT) charge, suggesting that this is a tax that most people do not need to worry about when dealing with the affairs of someone who has died. This is probably not a safe assumption.
IHT is a tax on the estate (the property, money and possessions) of someone who has died. There is normally no IHT to pay if either:
- the value of the estate is below the £325,000 threshold
- the deceased leaves everything above the £325,000 threshold to their spouse, civil partner, a charity or a community amateur sports club.
However, it is often still necessary to report the value of the estate even if it is below the above threshold. Most people also think of IHT as only being relevant when someone dies, but this is not quite true. IHT can be due on gifts that the person made during their lifetime and the amount payable can depend on a wide range of factors such as: when the lifetime gift was made, who is was made to, what type of gift was made and whether the person making the gift continued to derive benefit from it during their lifetime. For example, someone might think that giving their house to their children is a clever idea from an IHT point of view; but this won't work if they continue to live in the house after they have made the gift.
But the figures showing the percentage of estates affected by IHT is only half of the story. Government figures also show that IHT receipts for April 2023 to February 2024 are £6.8 billion, which is £400 million higher than the same period last year. This is in line with HMRC's focus on recovering IHT underpayments. Data also shows that HMRC opened over 2,000 investigations between April and November 2023.
This puts personal representatives (PRs) at risk, especially if they do not take advice when dealing with the administration of someone's estate. Even if they make an innocent mistake as to the amount of IHT payable, the estate will be liable for interest on unpaid IHT and the PRs could be personally liable if there is an IHT shortfall.
IHT is a complex tax regime and it may affect what appear to be even the most straightforward estates. PRs might consider that forewarned is forearmed and taking specialist advice early in the administration of the estate can save delay, problems and personal liability.
To discuss this or any other wills and probate matter, contact us.