What executors need to know about inheritance tax deadlines Dealing with the estate of a loved one who has passed away can be emotionally taxing. When named as the executor of their estate, the responsibility deepens as one must manage both legal obligations and complex financial matters. One of the most significant aspects of administering an estate in the UK is addressing the inheritance tax (IHT) implications. Executors are legally responsible for ensuring the correct amount of inheritance tax is calculated, reported, and, where applicable, paid by the due date. Inheritance tax can be complicated, consisting of various rules about when it is due, how it should be paid, and the conditions that may alter or reduce the tax liability. Missing deadlines or making errors can result in financial penalties, interest charges, or even legal repercussions. It is therefore vital for executors to have a firm grasp of the inheritance tax system and its deadlines if they are to administer an estate both diligently and lawfully. The Role of the Executor in Inheritance Tax Administration Executors are legally appointed individuals or institutions named in a will to manage a deceased person’s estate. If there is no will, an administrator performs similar functions under the laws of intestacy. Among an executor’s various duties, one of the most crucial is the handling of inheritance tax, which includes evaluating the value of the estate, preparing tax returns, making payments, and liaising with His Majesty’s Revenue and Customs (HMRC). An executor must ensure the proper valuation of all assets—including property, savings, investments, personal belongings, and overseas assets if applicable—while also accounting for all debts and liabilities. The net estate value then determines whether inheritance tax is due and, if so, how much must be paid. Executors must also ensure that any inheritance tax due is paid on time. This is not merely an administrative duty but a legal requirement. HMRC imposes strict penalties for late payments, misstatements, or failure to submit appropriate documentation, making prompt and accurate action essential. When Is Inheritance Tax Due? One of the most important deadlines for executors to understand is the due date for inheritance tax. Broadly speaking, inheritance tax must be paid by the end of the sixth month after the individual’s death. For example, if someone passes away in January, the tax must be paid by 31 July of the same year. This deadline applies regardless of whether probate (the legal right to deal with someone’s estate) has been granted. Executors must be proactive, preparing and organising financial information as soon as possible. Any delay in paying inheritance tax beyond this deadline results in interest charges being levied by HMRC, even if the delay is due to pending probate or assessments of valuation. It is important to note that in many cases inheritance tax must be paid before the executor can obtain probate. This means that funds may be needed from the estate or from other sources before the estate can officially be administered. Key Inheritance Tax Deadlines Executors Must Track Executors should be mindful of a series of critical deadlines and milestones when dealing with inheritance tax. Each of these plays an important role in ensuring compliance: Six-Month Payment Deadline: As mentioned earlier, the primary payment deadline for inheritance tax is six months from the end of the month in which the person died. For example, if a death occurred on 15 April, the IHT must be paid by 31 October. 12-Month Filing Deadline: While the IHT must often be paid within six months, the executor must also file the appropriate inheritance tax forms with HMRC within one year of the person’s death. The specific forms involved will depend on whether the estate is complex (requiring an IHT400 form) or simple (using an IHT205). Probate Applications: Executors must apply for a grant of probate in order to gain legal authority to distribute the estate. However, many probate registries now require that inheritance tax be settled, or at least arrangements be made, before probate is granted. Deadline for Interest: If the IHT is not paid by the six-month deadline, HMRC will begin to charge interest on the amount due. This interest continues to accrue until full payment is received. Instalment Options: Some aspects of inheritance tax can be paid in annual instalments over a maximum of ten years, particularly when the tax relates principally to property or family businesses. However, interest still accrues on the outstanding amount, even if approval is granted for this instalment method. Inheritance Tax Forms and Processes Filing the correct tax return with HMRC is a fundamental step in inheritance tax administration. The correct form will depend on the complexity and value of the estate: IHT205: This is used for estates where no inheritance tax is due. Often referred to as a ‘short form’, it covers straightforward estates that either fall within the nil-rate band (currently £325,000 per individual, as of 2024) or are otherwise exempt through spouse or charity exemptions. IHT400: This is the more comprehensive form used for taxable estates or those of more complex value. It is accompanied by a series of supplementary schedules, each of which provides further details regarding specific asset categories, debts, gifts made during the deceased’s lifetime, and trusts. The correct documentation and its timing crucially affect the administration timeline. Executors should ensure that they understand and correctly complete the relevant forms, ideally with the assistance of a professional if the estate is of significant value or intricacy. Payable from the Estate: Raising Funds for Inheritance Tax One of the most challenging aspects for many executors is arranging for payment of the inheritance tax, particularly if a large portion of the estate is tied up in illiquid assets such as property. HMRC usually expects payment before probate is granted, putting the executor in a balancing position of needing to access estate resources before legal authority has been confirmed. Executors have several options for raising the inheritance tax: Direct Payment Scheme (DPS): This enables banks or

How capital gains tax interacts with inherited property Understanding the interaction between capital gains tax and inherited property is essential for anyone dealing with bereavement, estate administration, or long-term wealth planning. While the topic may seem daunting, a clear grasp of the rules can clarify your obligations and potentially save a significant amount in tax. The good news is that, in the UK, there are specific tax provisions relating to inherited property that differ significantly from those that apply to property acquired in other ways. This article delves into the various dimensions of how capital gains tax (CGT) is applied in the context of inherited assets, with a primary focus on property. What happens upon inheritance When someone inherits a property in the UK, the first tax-related concern is typically not CGT, but rather inheritance tax (IHT). This tax is levied on the value of a deceased person’s estate, including any land, property, possessions, and money, and is generally assessed before the distribution of assets to beneficiaries. As such, by the time you inherit property, any IHT liabilities have usually been taken into account and, in many cases, settled by the estate. Importantly, there is no CGT due at the point of inheritance. Whether the property subsequently goes up or down in value is irrelevant at the moment it changes hands from the deceased to the heir. This aspect often creates confusion, as individuals tend to assume that acquiring a property—even by inheritance—could prompt an immediate CGT obligation. But this is not the case. The concept of the “probate value” A crucial concept to understand in this context is the so-called “probate value,” which refers to the market value of the property at the date of death. This valuation is used not only for probate purposes but also becomes the property’s base value in the hands of the individual inheriting it. If the beneficiary eventually sells the property, it is the difference between the eventual sale price and the probate value that forms the basis for CGT. This differs notably from other forms of property acquisition wherein the historical purchase price is used. For inherited property, the historical cost to the deceased is irrelevant for CGT calculation purposes. From a tax perspective, it is assumed that the individual who inherited the asset acquired it at its market value as of the date of death. Capital gains tax implications upon sale A CGT obligation only arises if and when the beneficiary decides to sell the inherited property and if the sale generates a profit beyond the probate value. If the sale occurs at a price equal to or lower than the probate value, no CGT liability would arise. However, if the property appreciates in value after the date of death and before being sold by the inheritor, the gain is subject to CGT. The amount of CGT payable depends on various factors, including the individual’s personal income, as capital gains are taxed at different rates depending on whether you are a basic-rate or a higher-rate taxpayer. For residential property, the rates are currently 18% for basic-rate taxpayers and 28% for higher-rate taxpayers. These rates could vary if legislative changes are introduced, so verifying the tax treatment in line with current HMRC guidance at the time of sale is essential. Private residence relief and its role Another component to consider is whether the inherited property becomes the beneficiary’s main home. If so, the individual may qualify for private residence relief, which can significantly reduce or even eliminate any CGT payable on a future sale. However, to qualify for this relief, the property must be the individual’s only or main residence for all or part of the time they own it. For example, let’s assume a person inherits a house and moves into it shortly thereafter, living there for several years before deciding to sell. In this scenario, a proportion of the gain may qualify for relief, into which numerous variables such as duration of occupation and whether the property was let out would come into play. It is always advisable to seek professional tax advice in such cases, as the relief calculation can be intricate. Letting the inherited property Many people choose not to sell the inherited property immediately. Instead, they may decide to rent it out either as a source of passive income or until market conditions are more favourable for selling. From a CGT perspective, this approach presents additional considerations. While letting out a property does not in itself create a CGT obligation, it may complicate the calculation when the property is eventually sold. If the property was at one point your main residence, you might still qualify for some private residence relief, and potentially for lettings relief as well. However, HMRC made significant changes in 2020 that restricted the scope of lettings relief. It now only applies if the owner was in shared occupancy with the tenant. Therefore, while letting out an inherited property can be financially advantageous in the interim, it may reduce the overall tax-efficiency of the asset unless planned carefully. Joint inheritance scenarios Another factor to consider is what happens when more than one person inherits a property. It’s a common scenario in cases where siblings inherit the family home jointly. From a tax perspective, each individual is considered to own a proportionate share of the property based on the terms of the will or rules of intestacy. Each heir is then responsible for declaring and paying CGT based on their share of the gain when the property is sold. This division can offer some tax advantages. For instance, each person is entitled to their own annual CGT allowance, which for the 2023/2024 tax year is £6,000. This allowance reduces taxable gains and can be strategically used in multi-heir situations to minimise overall tax liability. Furthermore, if only one of the beneficiaries resides in the property, that individual alone may qualify for private residence relief on their share. Gifting an inherited property instead of selling

Tax considerations when inheriting a buy-to-let property Inheriting property can bring a range of emotions and complexities, especially when the asset involved is a buy-to-let property. While the financial windfall may appear beneficial at first glance, the reality of tax obligations and ongoing responsibilities often requires careful consideration. Rental properties differ significantly from residential homes in terms of tax treatment, financial responsibilities, and legal implications. It is vital for any beneficiary to understand the relevant tax laws, assess the investment’s viability, and navigate the challenges of property ownership with informed decision-making. Initial Tax Obligations: Inheritance Tax In the United Kingdom, the most immediate tax implication when inheriting a rental property is Inheritance Tax (IHT). This tax is assessed on the value of the deceased’s estate, which includes all property, financial assets, and possessions minus liabilities. As of the 2023/24 tax year, the standard inheritance tax rate stands at 40% on the value exceeding the nil-rate band threshold of £325,000. There is an additional residence nil-rate band of £175,000 per person, which may apply if the deceased is passing their home to a direct descendant. However, rental properties often do not benefit from this additional allowance, unless the property was recently converted from a residential home and remains part of the estate of someone passing it to a child or grandchild. The IHT liability is usually paid out of the estate before the assets are transferred to heirs. However, if the estate lacks sufficient liquid assets, heirs may find themselves needing to sell the buy-to-let property or raise funds to cover the tax bill. HMRC provides the option for tax to be paid in instalments over a 10-year period when property is involved, though interest will accrue on outstanding amounts after the first year. It is also important to consider whether any exemptions or reliefs apply. For example, spouses and civil partners can pass assets to each other tax-free and any unused IHT threshold can be transferred to the surviving partner, potentially doubling the tax-free allowance for the eventual beneficiaries. Capital Gains Tax on Future Sales While there is no Capital Gains Tax (CGT) due at the moment of inheritance, any subsequent sale of the rental property may trigger a CGT liability. The gain is calculated as the difference between the market value of the property on the date of inheritance and the eventual selling price. Beneficiaries effectively acquire the property at its “probate value”, which becomes the new base cost for CGT purposes. The UK government altered CGT rules for residential property disposals, and for the 2023/24 tax year, individuals benefit from an annual CGT allowance of £6,000 (reducing to £3,000 from April 2024). For buy-to-let properties, gains above this threshold are taxed at 18% for basic-rate taxpayers and 28% for higher or additional-rate taxpayers. Additionally, property owners must report the sale and pay any CGT owed within 60 days of the transaction’s completion. This timely obligation is a significant change from prior rules and has caught out many individuals who are not professionally advised. Beneficiaries should consider obtaining a professional property valuation at the time of inheritance to accurately establish the base cost for future CGT calculations. If there are plans to sell the property in future, tax planning around timing, ownership structure, and use of allowances is advisable. Income Tax on Rental Earnings Once inherited, a buy-to-let property continues to generate rental income, and beneficiaries must declare this income to HMRC. The net profit – rental income minus allowable expenses – will be added to the individual’s total income and taxed at the relevant marginal rate. Allowable expenses include letting agent fees, maintenance and repairs, insurance, council tax (if the property is vacant), and mortgage interest (within the limits of current tax rules). Since the 2020 changes, mortgage interest relief is restricted to a basic-rate (20%) tax credit rather than being fully deductible. This change may reduce the tax efficiency of highly leveraged properties for higher-rate taxpayers. If more than one beneficiary inherits the property, each individual must report their share of the rental income and corresponding expenses. It is critical to maintain accurate records of all revenues and deductions, as these may be required for both annual tax self-assessment returns and for use in any future CGT calculations upon disposal. Joint Ownership and Legal Considerations Inheritance does not always result in sole ownership. It is common for multiple heirs, such as siblings, to inherit a property jointly. Joint ownership brings its own legal and financial considerations. There are two types of joint ownership: joint tenants and tenants in common. As tenants in common, each party owns a distinct share of the property. This arrangement enables each owner to dispose of their share under their own will. Joint tenants, on the other hand, means all owners have equal rights to the whole property, and the share of a deceased joint tenant automatically passes to the surviving tenant(s). For rental income, each joint owner is taxed on their share according to their ownership proportion. It is advisable to set out the exact ownership shares and rental income splits in a legal agreement or indicate them correctly to HMRC when registering the property income. Managing a jointly owned buy-to-let property involves collaboration in decisions related to rental practices, maintenance, renovation, and potential sale. Disputes between beneficiaries can complicate these processes, so open communication and, where necessary, formalising roles and plans through a legal agreement are essential. Dealing with Mortgaged Buy-to-Let Properties In some cases, inherited rental properties may come with outstanding mortgage obligations. The mortgage does not disappear upon death; rather, it is either repaid from the estate or becomes the responsibility of the beneficiary if they wish to retain the property. When a mortgaged property is inherited, it is essential to confirm whether the mortgage is a standard buy-to-let mortgage or a more specialised product. The lender will need to assess whether the inheritor can afford to take on the mortgage. If not, the property may need to

The Seven Year Rule Gifting Assets and Its Impact on IHT Understanding the nuances of inheritance tax (IHT) is vital for anyone looking to manage their estate effectively. Among the various strategies used to mitigate IHT liabilities, the concept commonly referred to as the “Seven Year Rule” plays a central role in estate planning. This principle applies to the gifting of assets and has significant implications for how much tax might be due on a person’s estate after they pass away. While it can offer substantial advantages, it is accompanied by complexities that require careful consideration and planning. This article examines how the rule works, the different types of gifts it applies to, the potential tax repercussions, and various exceptions and planning opportunities that individuals and families should be aware of. What is Inheritance Tax? Inheritance Tax is a tax on the estate of someone who has died, including all property, possessions, and money. In the UK, the current standard IHT rate is 40%, charged on the portion of an estate that exceeds the nil-rate band, which is set at £325,000 per individual. Additional reliefs, such as the residence nil-rate band, may increase this threshold if a home is passed to direct descendants. While this might seem straightforward, gifting assets during one’s lifetime introduces another layer of complexity to the IHT system. This is where the rule discussed comes into relevance. How Gifting Can Reduce IHT Liability Gifting during one’s lifetime can reduce the value of an estate and, by extension, lower the amount of IHT that might be payable upon death. There are several types of gifts, including cash or physical items like jewellery, property, or shares. The notion is that if these gifts are made far enough in advance of one’s death, their value no longer forms part of the donor’s taxable estate. This is essential for those looking to efficiently manage the potential tax implications of passing assets onto heirs. Yet, the benefits hinge greatly on the timing of these gifts, and this is where timing rules come into play. Understanding the Seven-Year Time Frame Broadly speaking, if you gift assets and survive for at least seven years after making the gift, the gift falls outside your estate for IHT purposes. This is commonly referred to by tax planners and legal professionals as the “Seven Year Rule,” derived from HM Revenue & Customs (HMRC) guidance. The rule only applies to what is termed Potentially Exempt Transfers (PETs). A PET becomes exempt if the donor survives for seven years post-gift. If they pass away before the end of the seven-year period, the gift is reassessed for IHT, and it may fall back into the estate. Taper Relief and Its Role If the donor dies within the seven-year window, all is not necessarily lost from a tax efficiency standpoint. The tax payable may be reduced by something known as “taper relief.” Taper relief reduces the IHT payable on the gift, depending on how many years have passed since the gift was made. For example, if death occurs between three and seven years after the gift, the tax is tapered as follows: – 3 to 4 years: 80% of the tax payable– 4 to 5 years: 60%– 5 to 6 years: 40%– 6 to 7 years: 20% Taper relief does not reduce the value of the gift, but rather the amount of tax due on it. Also, it only applies to gifts that exceed the nil-rate band. This means that gifts totalling under £325,000 in a seven-year period would not benefit from further tapering, since no tax would have been payable on them initially. Exempt Gifts and Regular Giving Not all gifts are subject to IHT, and there are a number of exemptions that allow individuals to gift more efficiently. Understanding these exemptions is crucial to optimising estate planning from a tax perspective: – Annual Exemption: Each individual can give away up to £3,000 per tax year, which is immediately exempt from IHT. If unused, this can be carried over for one year only, allowing for a maximum of £6,000 to be gifted in a single year.– Small Gifts Exemption: Gifts of up to £250 per person per year are exempt, provided that the recipient hasn’t benefited from the annual exemption.– Wedding Gifts: These are exempt to varying limits—£5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for anyone else.– Gifts out of Surplus Income: If you regularly gift part of your income, and this does not affect your standard of living, such gifts may be exempt. Documenting this pattern is crucial for later validation.– Charitable Donations: Gifts to UK-registered charities are completely exempt from IHT and may even reduce the overall tax rate applicable to the estate if more than 10% is left to charity. The Role of the Nil-Rate Band It’s important to link gifts within the seven-year period to the nil-rate band. The nil-rate band offsets the taxable value of gifts made in the seven years before death, in chronological order. This means earlier gifts benefit first from the exemption, and later gifts use what is left. Once the threshold is exhausted, any additional gifts are subject to IHT. For example, imagine you were to gift £150,000 each to two children, one in year one and the second in year five. If you die in year six, the first £150,000 would enjoy full nil-rate coverage, but only £175,000 of the second gift would be covered (assuming no other gifts were made). The excess would be taxable, possibly subject to taper relief. Clawback of Liability In many cases, the person who received the gift, not the estate, may be responsible for paying any IHT that arises due to a failed PET. If the donor’s estate lacks sufficient assets to cover the tax liability, HMRC will turn to the recipient. That’s why it’s vital for recipients to understand the implications of receiving large gifts and for givers to inform them of potential future obligations. Gifts

Utilizing Business Relief to Reduce Inheritance Tax Understanding how to mitigate potential inheritance tax (IHT) liabilities is a crucial part of financial planning, especially for individuals who have built significant wealth or own businesses. One particularly effective but often underutilised method is through the strategic use of Business Relief (BR). This form of tax relief can be a valuable tool for preserving wealth within families and ensuring smoother intergenerational transfers of business assets. In today’s ever-evolving regulatory and economic landscape, comprehensively understanding how to leverage such tools is more important than ever. This article delves deeply into how individuals and families can strategically utilise Business Relief to legitimately reduce their IHT bills. From understanding the fundamentals of BR to practical applications and potential pitfalls, this guide covers broadly what needs to be understood to make informed decisions. What is Business Relief? Originally introduced in the Finance Act 1976, Business Relief (formerly known as Business Property Relief) was designed to encourage entrepreneurship and investment in trading businesses by allowing certain business assets to be passed on either free from inheritance tax or with a significant reduction. The rationale behind this policy was to ensure that viable businesses would not be sold or broken up simply to pay IHT liabilities upon the owner’s death. Business Relief works by reducing the value of a business or its assets when calculating the IHT due. It offers either 50% or 100% relief, depending on the type of asset and the level of ownership and control the deceased held at the time of death or when the gift was made. Assets That Qualify for Relief To take advantage of this relief, certain criteria must be met. Generally, Business Relief is available on: – Shares in an unlisted trading company, including those listed on the Alternative Investment Market (AIM)– An interest in a business, such as a partnership– Land, buildings, or machinery used wholly or mainly for the purposes of the business Qualifying assets must usually have been owned for at least two years prior to death or transfer in order for the relief to be claimed. There are important exclusions as well. Businesses that consist mainly in the making or holding of investments — such as land or property investment businesses — typically do not qualify. Similarly, businesses involved mainly in dealing in securities, stocks, land, or buildings are ineligible. Percentage Levels of Relief The percentage of reduction in taxable value depends on the type of asset: 100% Business Relief is available on: – A business or an interest in a business– Shares in an unlisted company, including most shares quoted on the AIM 50% Business Relief is applicable to: – Shares in a business where the deceased had no control– Land, buildings, or machinery used in a business that the deceased controlled or in which they had an interest Professional guidance is often needed to accurately interpret how these distinctions apply to specific cases, particularly where the deceased’s interest in a business was not straightforward or where businesses are diversified. Conditions for Qualification Besides asset classification, a number of other conditions must be met to qualify for Business Relief. Ownership Period: The asset must have been owned for a continuous period of at least two years. This period can be satisfied by the current owner or through connecting ownership, such as if the asset was inherited from a spouse or civil partner. Trading Status: The business must be a trading entity rather than an investment entity. This is perhaps one of the more contentious and nuanced aspects of BR. A “trading company” is defined by the activities making up more than 50% of its operations — i.e., it must not have substantial non-trading activities such as letting property or managing investments. Utilised vs. Passive: Where land, buildings, or equipment are held outside the business (e.g., personally owned and leased to the trading company), relief can still apply but only at the 50% level, and further conditions must be met. Continuity of Trading: If a business changes its model from trading to investment shortly before or after death, this can jeopardise the tax position and negate eligibility for Business Relief. Practical Application of Business Relief Entrepreneurs and investors often consider how to structure their business affairs to maximise entitlement to Business Relief. Doing so involves a variety of planning mechanisms. For those who own a trading business, ensuring the business retains its trading status is critical. This might involve regular reviews of the business’s income sources and asset portfolio to prevent a drift into investment-like operations. Family-owned businesses, in particular, can benefit from strategic inheritance planning, ensuring that interests pass smoothly and with minimal tax disruption. In the context of succession planning, Business Relief can be a cornerstone of retaining control and value within the family. By transferring shares that qualify under BR to the next generation, families can bypass a substantial IHT charge that might otherwise force asset sales or external borrowing to settle tax liabilities. Business owners can also use trusts in conjunction with Business Relief. Placing qualifying assets into a discretionary trust during their lifetime — assuming the two-year ownership condition is met — can mitigate both immediate and future IHT exposure. Trusts can then facilitate more refined control over how and when the next generation accesses the business or wealth. Investors without their own businesses might consider investing in BR-qualifying assets to reduce the future impact of inheritance tax. For instance, purchasing shares in AIM-quoted companies that qualify for BR can entitle the investor to 100% relief after two years. This has led to the growth of specialised IHT-focused portfolios offered by financial institutions that bundle together qualifying shares under professional management. Planning Considerations While Business Relief offers substantial advantages, it should not be relied upon in isolation. A holistic approach to estate and succession planning ensures that one’s broader financial goals are also met. Firstly, liquidity is a concern. Assets qualifying for BR are often illiquid — such as private

How to Gift Property in a Will Without Paying Excessive Tax Understanding how to pass on property through a will can be one of the most significant financial decisions a person makes in their lifetime. While the desire to provide for loved ones is commendable, there’s also the practical matter of taxation that should not be ignored. Without appropriate planning, a substantial portion of your estate could end up with the taxman rather than your intended beneficiaries. In the UK, inheritance tax (IHT) can take a considerable slice, but there are strategies that can be employed to mitigate the burden. This comprehensive guide explores the tax implications of gifting property through a will and provides intelligent, well-informed approaches that can help minimise unnecessary costs while ensuring your wishes are honoured. Understanding Inheritance Tax and Property Inheritance tax in the UK is levied on a deceased person’s estate if its value exceeds a certain threshold. As of the current rules, the standard inheritance tax threshold is £325,000. Anything above this amount is usually taxed at a rate of 40%. Importantly, this figure can be higher when a residence is left to direct descendants, thanks to the Residential Nil Rate Band (RNRB), which provides an additional tax-free allowance. Property often represents the largest part of an estate’s value, making it the most exposed asset to taxation. The consequences can be significant. Heirs may be forced to sell beloved family homes just to pay the tax bill. However, with proper planning and legal tools, it’s possible to legally reduce the IHT liability and pass on more of your wealth to your beneficiaries. Gifting During Lifetime vs Through a Will One key distinction to make from the outset is between gifting property while alive and passing it on through a will. If you transfer property during your lifetime, it may be considered a potentially exempt transfer (PET). If you survive seven years from the date of the gift, it is usually exempt from inheritance tax altogether. On the other hand, if you bequeath property through your will, and your estate exceeds the threshold, it could be subject to IHT at the full rate. That said, transferring property during your lifetime is not always feasible or desirable. Some people prefer to retain use of the property or feel that distributing assets early could disrupt family dynamics. Making use of the allowances and reliefs within your will can reduce or eliminate tax even when gifting upon death. Let’s explore those navigational tools. The Nil Rate Band and Main Residence Nil Rate Band Two significant allowances are available when considering passing on property via a will. The Nil Rate Band is a £325,000 threshold below which no inheritance tax is payable. This band applies to your entire estate, including property, savings, and investments. For example, if your estate qualifies only for this amount, there is no inheritance tax due. The Main Residence Nil Rate Band came into effect in 2017 to help families pass on homes more easily. This allowance (currently up to £175,000 per person) applies when the family home is left to direct descendants (children, stepchildren, adopted children, or grandchildren). Combined with the standard Nil Rate Band, married couples or civil partners can effectively pass on up to £1 million tax-free. To qualify for the RNRB, certain conditions must be met. The property must have been your residence at some point, and it must be passed to a direct descendant. If you have no children or grandchildren, this additional relief will not apply. Marriage and Civil Partnership: A Tax Advantage Married couples and those in civil partnerships enjoy significant tax-related benefits when making provisions in their wills. Transfers between spouses or civil partners are entirely exempt from inheritance tax, regardless of the amount. Moreover, if one spouse does not fully use their nil rate band upon death, any unused portion can be transferred to the surviving spouse. As a result, when the second partner dies, their estate can benefit from up to £650,000 in tax-free allowance, or £1 million when combined with the RNRB if leaving a main residence to a direct descendant. This double-use of allowances is an extremely effective planning tool. However, such benefits are not available to cohabiting couples who are not legally married or in a civil partnership, regardless of the length of their relationship or whether they share children. Proper planning becomes especially critical in such cases. Trusts as a Vehicle for Property Gifting Including trusts in your will can be a versatile method to gift property while controlling how and when beneficiaries receive it. Trusts offer more than mere control; they can have important tax implications depending on their structure. A discretionary trust, for instance, gives the trustees (often family members or solicitors) the power to determine how to distribute assets among a group of named potential beneficiaries. This can be helpful if the future needs and financial maturity of beneficiaries are uncertain. However, discretionary trusts are subject to their own inheritance tax rules and periodic charges, so careful structuring and legal advice are essential. An interest in possession trust allows a beneficiary (often a surviving spouse) to receive income or use the property during their lifetime, with the eventual capital passing to another party. These can be especially useful in second marriages or complex family situations. The value of such a trust may still be liable for IHT, but it allows assets to be protected from irresponsible heirs, divorce settlements, or creditors. Bare trusts, where beneficiaries have absolute rights to the property, pass assets directly and often carry minimal tax burdens. However, they are less flexible and may not be ideal in all circumstances. Transferring Agricultural or Business Property For those who own agricultural or business property, specific reliefs can reduce or eliminate IHT entirely. Agricultural Property Relief (APR) and Business Property Relief (BPR) can be extremely favourable when structured correctly in your will. APR provides up to 100% relief on agricultural land and buildings, including farmhouses

The Tax Implications of Receiving an Inheritance in the UK Understanding the financial consequences of receiving assets from a deceased person’s estate is vital for beneficiaries in the United Kingdom. While inheritances are often associated with a sense of loss and emotion, they also come with important legal and tax responsibilities. One of the most common queries from heirs concerns taxation, especially given the complex nature of UK inheritance laws. Knowing what taxes, if any, must be paid, who is responsible for those payments, and how to manage inherited assets efficiently is essential for preserving wealth and ensuring compliance with HM Revenue & Customs (HMRC). This article provides a detailed overview of the key tax implications associated with receiving an inheritance in the UK, focusing on the various taxes that might apply, the responsibilities of executors and beneficiaries, and strategies for managing inherited assets responsibly. Inheritance Tax Overview In the UK, Inheritance Tax (IHT) is often central to the tax discussion around inheritance. However, a common misconception is that the person receiving the inheritance — the beneficiary — pays this tax directly. In the majority of cases, IHT is actually assessed on the estate of the deceased, not the recipient. IHT is charged at 40% on the value of an estate that exceeds the current nil-rate band threshold, which as of the 2024-2025 tax year is £325,000. There is an additional residence nil-rate band of £175,000 if the main residence is left to direct descendants, such as children or grandchildren. These thresholds can be combined in certain situations, potentially shielding up to £500,000 per person — or £1 million for a married couple or civil partners — from IHT. Executors or personal representatives are responsible for ensuring that any IHT due is paid before distributing the estate to beneficiaries. The tax is typically paid out of the estate’s funds prior to division. In rare cases where the estate does not have the available liquidity, beneficiaries might need to contribute or arrange funding in order to settle the tax bill. Gifts and the Seven-Year Rule Another important consideration involves gifts made by the deceased in the seven years preceding death. Gifts may also be subject to IHT if they fall within this period. Known as the “seven-year rule”, these are classified as Potentially Exempt Transfers (PETs). If the donor lives for at least seven years after making a gift, the gift normally becomes exempt from IHT. However, should the donor die within this timeframe, the value of the gift is added to the estate for tax calculation purposes. Taper relief may reduce the IHT payable on some gifts if they were made more than three years before death. The tax rate on these gifts gradually decreases from the full 40% to 8% as the gift moves closer to the seven-year mark. However, taper relief only affects the amount of tax due, not whether the gift itself is taxable. Exemptions and Reliefs Several exemptions and reliefs are available that help reduce or eliminate IHT liabilities. Spouses and civil partners are generally exempt from IHT on assets inherited from each other, regardless of the value of the estate. This applies whether the couple are based in the UK or overseas, although complications may arise if one person is domiciled abroad. Charitable bequests are also exempt from IHT. Moreover, if at least 10% of the net estate is left to charity, the IHT rate on the remainder of the estate may be reduced from 40% to 36%, providing an incentive for philanthropic giving. Certain types of business and agricultural property may also qualify for Business Property Relief (BPR) or Agricultural Property Relief (APR), potentially allowing these assets to be passed on with reduced or no IHT liabilities. These reliefs are highly specific and subject to complex qualification rules, making professional advice prudent. Capital Gains Tax on Inherited Assets Unlike Inheritance Tax, Capital Gains Tax (CGT) becomes relevant after the date of inheritance rather than at the time of transfer. Beneficiaries do not pay CGT when they inherit an asset, but they may face CGT liability if they later sell the asset and it has appreciated in value since the date of death. For CGT purposes, the inherited asset assumes a new base value — known as the ‘probate value’ — which reflects its market worth at the time of the benefactor’s death. When the asset is later disposed of, any gain is calculated based on the difference between the sale proceeds and the probate value. For example, if you inherit a property valued at £400,000 at the time of death and later sell it for £450,000, the gain would be £50,000. Depending on your income tax bracket and whether the asset qualifies for any reliefs, such as Private Residence Relief for main homes, this gain could be subject to CGT at a rate of 10% for basic rate taxpayers or 20% for higher rate taxpayers (28% for residential property gains). Note that the standard annual CGT exemption — £3,000 for individuals in the 2024-2025 tax year — still applies and can offset small gains. Income Tax Implications Inheritances involving income-generating assets such as rental properties, dividend-paying shares, or savings accounts can have income tax implications for the beneficiary. While the inheritance itself is not taxable as income, any income generated by the inherited assets after the date of inheritance is considered part of the recipient’s normal taxable income. For instance, if you inherit a buy-to-let property and start earning rental income, you must report this through your self-assessment tax return and pay any income tax due according to your overall income band. Similarly, dividends received from inherited stocks or funds are taxable in line with prevailing dividend tax rates. In cases where assets remain within a trust created by the deceased, different tax rules may apply. The trust may be taxed as a separate entity, and the distributions to beneficiaries may carry their own income tax liabilities depending on the nature of the

Understanding The Residence Nil Rate Band for Inheritance Tax Inheritance Tax (IHT) is a crucial aspect of estate planning in the United Kingdom. Many families strive to ensure that as much of their wealth as possible can be passed on to future generations without excessive taxation. In 2017, the UK government introduced an additional allowance known as the Residence Nil Rate Band (RNRB) to assist homeowners in reducing their inheritance tax liability. This article explores the details of the RNRB, how it works, who can claim it, and strategies for making the most of this valuable tax relief. The Basics of Inheritance Tax and the Nil Rate Band Before delving into the specifics of the RNRB, it is helpful to understand the broader context of Inheritance Tax in the UK. IHT is charged at a rate of 40% on the value of an estate that exceeds the standard nil rate band (NRB), which is currently set at £325,000 per individual. This threshold has remained unchanged since 2009. For married couples and civil partners, any unused portion of the nil rate band can be transferred to the surviving partner. This effectively allows couples to pass on up to £650,000 free of inheritance tax. However, with rising property prices, particularly in the South East and London, the standard nil rate band often fails to shield the family home from tax implications, which is where the RNRB becomes important. What is the Residence Nil Rate Band? The Residence Nil Rate Band is an additional allowance designed specifically to help individuals pass on their family home to direct descendants without incurring inheritance tax. Introduced on 6 April 2017, the RNRB provides an extra tax-free allowance on top of the existing nil rate band. When first introduced, the RNRB was set at £100,000 per individual, and it gradually increased each tax year until it reached £175,000 in the 2020/21 tax year, where it has remained since. Like the standard nil rate band, the RNRB is also transferable between spouses and civil partners, which means that a couple can potentially benefit from a combined additional allowance of £350,000. Who Can Benefit from the Residence Nil Rate Band? Not all estates qualify for the RNRB. There are specific requirements that must be met: 1. Property Ownership – The deceased must have owned a residential property, or a share in one, that was part of their estate when they died.2. Passing the Home to Direct Descendants – The property must be inherited by direct descendants, which includes children, stepchildren, adopted children, foster children, and grandchildren. Nieces, nephews, siblings, and other relatives do not qualify.3. Estate Value Below £2 Million – The full RNRB is available only if the estate is valued under £2 million. For estates exceeding this threshold, the RNRB is reduced by £1 for every £2 over the limit, meaning estates worth £2.35 million (or £2.7 million for couples) receive no benefit. Claiming the Residence Nil Rate Band The RNRB is not automatically applied. Executors of the estate need to make a claim when applying for probate. It requires submitting the necessary paperwork to HM Revenue & Customs (HMRC), including evidence that the property is passing to eligible direct descendants. The same process applies when transferring unused RNRB from a deceased spouse. Downsizing and the Residence Nil Rate Band A valuable feature of the RNRB is that homeowners do not necessarily need to own a property at the time of death to qualify. If an individual has downsized their home or sold their property on or after 8 July 2015, they may still be eligible to claim the RNRB, provided that they pass equivalent assets to their direct descendants. This rule ensures that those who choose to move into smaller homes, or even into care, do not lose the tax benefits of the allowance. Maximising the Residence Nil Rate Band To make the most of this tax relief, individuals should consider estate planning strategies. Some key approaches include: – Wills and Property Passing – Ensuring that the family home is left directly to children, grandchildren, or other qualifying descendants in a legally valid will is essential. If the property is left to a discretionary trust, the RNRB may not apply.– Utilising Inter-Spouse Transfers – The RNRB is fully transferable between spouses, effectively providing a combined allowance of £350,000. Proper estate planning should ensure any unused allowance is preserved.– Keeping the Estate Below £2 Million – Since the allowance is gradually withdrawn for estates over £2 million, individuals close to this threshold should consider gifting assets or making use of trust arrangements to reduce the overall value of their estate.– Downsizing Considerations – Effective record-keeping of previous property ownership is important when claiming the downsizing relief. Passing equivalent assets to direct descendants is necessary to retain the RNRB benefit. Common Misconceptions About the Residence Nil Rate Band There are several misunderstandings surrounding the RNRB, leading to potential unexpected tax liabilities: – Only Property Passed to Direct Descendants Qualifies – If the family home is left to a relative who is not a direct descendant, such as a nephew or sibling, the RNRB does not apply.– The RNRB is Not Automatic – Many assume that the tax relief is applied automatically, but in reality, executors must make a claim through the probate application process.– All Estates Qualify Regardless of Size – If the total estate exceeds £2.35 million (£2.7 million for couples), the RNRB is removed entirely. The Impact of Inflation and Government Policy As property values continue to rise, more estates are being pushed over the inheritance tax threshold. While the RNRB was designed to ease this tax burden, the allowance has been frozen at £175,000 per individual since 2020, meaning its real-term value is diminishing each year due to inflation. Meanwhile, the standard nil rate band remains unchanged at £325,000, adding additional pressure on families facing inheritance tax liabilities. There have been discussions about reforming the current IHT system, particularly given the increasing number of families being affected. However, at present, the RNRB remains a