In the UK and in many other countries, when someone dies, their estate may be subject to tax. In most cases, that tax due is Inheritance Tax (IHT) which the family of the deceased pay on their ‘inheritance’. However, in some cases, if the deceased’s estate is extensive and incorporates overseas investments or properties, a family business or anything else that ‘earns’ an income, Capital Gains Tax (CGT) may also be applicable.
How much tax on probate the family pays on a deceased’s estate largely depends on its total value. The estate includes any pay-outs on life assurance policies, investments, rental properties and cash in the bank. It may be that the deceased’s estate is not liable to pay tax on probate if the value of the estate is below HMRC’s tax threshold.
In addition, following changes to the way Inheritance Tax is calculated from January 2022, the reporting of IHT has been simplified. So, how much tax on probate do you pay in the UK?
What is Inheritance Tax and Capital Gains tax on probate?
Inheritance Tax is a tax on the value of the estate of someone that has passed away. The deceased’s beneficiaries/family is liable to pay tax at a rate of 40% on the estate’s value, over and above the UK IHT tax threshold of £325,000.
For example, if the deceased’s estate is valued at less than £325,000 no IHT is payable to HMRC. However, if the deceased’s estate is valued at £400,000, the beneficiaries/family/executors will be liable for tax on the amount above the tax threshold, i.e. £75,000.
Capital Gains tax on probate is not usually required on the transfer of assets to beneficiaries. However, any assets acquired by the deceased’s estate after death could be liable for CGT; i.e. it is a tax on ‘gains’ usually associated with residential property but it can also be applied to investments and businesses. This means that when the beneficiary or executor sells or gives away the asset, CGT is due on the ‘gain’ in the value of the asset between the date of the deceased’s death and when the asset was sold or given away.
For example, if the value of the deceased’s property was £200,000 upon death, but by the time it was sold, the value had increased to £250,000, the estate (beneficiaries or family) may have to pay CGT on the ‘gain’ of £50,000.
What is the Inheritance Tax threshold?
There is currently only one threshold of £325,000. This is known as the ‘nil-rate band’ (NRB), and an estate that is valued below this threshold does not pay any tax on probate. Estates above the threshold are liable for Inheritance Tax at a rate of 40%. Let’s give you an example:
If your estate is worth £600,000, your IHT is calculated as follows:
£600,000 – £325,000 = £275,000
£275,000 x 40% = £110,000 tax on probate due
Therefore, the deceased’s beneficiaries receive £325,000 + £165,000 (the remainder value of the estate once tax has been paid), which equals £490,000.
However, there are several situations where the Inheritance Tax threshold is different.
- Married and civil partnerships – if you are married or in a civil partnership and leave your entire estate to your spouse or partner, if one partner dies first, there is no tax to pay, and in most cases, the nil rate band threshold won’t be affected either. This means that the living spouse can add the unused balance of their deceased spouse’s/partner’s threshold to their own, essentially doubling their threshold when they die. However, if the spouse/partner leaves a part of their estate to other beneficiaries, like children, or made a lifetime gift seven years prior to their death, and the estate is of high enough value, Inheritance Tax is due, and a proportion of the nil rate band threshold may be taken.
- Leaving a property – if you are married or in a civil partnership and leave the family home to your living spouse or a direct descendent, i.e. a child or grandchild only, in its entirety, under current rules there is a further £175,000 tax-free allowance but only if the value of the property is under £1 million. Anything above this value and the allowance drops significantly. The good news is that any unused tax allowance balance can be added to the living spouse’s allowances on their death.
Do spouses and civil partners pay a tax on probate?
In most cases, spouses and civil partners can leave their estate tax-free. In addition, the surviving spouse or partner can add any unused tax-free allowance to their own tax allowances. So, in reality, the deceased can leave their spouse/partner as much as £650,000, or £1 million if it includes a property, without them having to pay any tax on probate.
However, if the deceased spouse/partner used most or all of their tax-free allowance by leaving a proportion of their estate to a direct descendent, the above does not apply.
Tax-free gifts and trusts
It is possible to make gifts to spouses/partners or to charities, which may be exempt from tax, but it does depend on when the gift was made. If it was given at least seven years prior to death – if it’s not gifted to a business or a trust – there will be no tax to pay on the gift. However, if the person dies before the seven years, there will be a tax levy to pay and how much depends on when the person dies during that seven-year period. This is known as IHT taper relief on potentially exempt transfers (PETs).
It is also possible to put assets into a trust that is left to a beneficiary after death. Whilst a trust doesn’t exempt the estate from paying tax on probate, it can go some way to reducing the amount of Inheritance Tax paid. This is because any assets held in a trust, and managed by appointed trustees on behalf of the beneficiaries, are owned by the trust, not the trustees or the person who set up the trust. If you live beyond seven years from the date the trust was established, those assets are not included in the estate upon death and may be tax-free. Instead, a 20% IHT tax levy is imposed when you set up the trust, and every ten years, the assets are revalued, and 6% IHT is paid at the time, minus the nil rate band threshold of £325,000.
Whenever you are writing a will, it’s always important to understand the tax implications on your beneficiaries, family and executors first.
At Probates Online, we offer a will writing service or a Complete Estate Service to help you through the probate process and estate administration upon the death of a loved one. If you are looking for advice on inheritance tax, gifts or trusts, or need to apply for Grant of Probate, Letters of Administration or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.