Inheritance Tax Allowances – Use them or lose them!

Probate is the term often used for the process of administering a person’s estate after they have died. Grant of Probate (also called Letters of Administration) is an order from the court, required when a person has died and leaves significant assets and/or a property.

Before you apply for a Grant of Probate, you must submit an account to HMRC to declare the assets in the estate. If there is tax to pay, you usually need to pay it at the time you submit your probate application.

Following the onset of the Coronavirus pandemic, many have found it difficult to administer an estate because of the obvious constraints and delays in getting information from organisations. For that reason, it is possible that many Executors have put-off administering estates, believing that it is not urgent and can wait.

However, it is very important if you are an Executor of an estate that you do not delay. Inheritance Tax must be paid by the end of the 6th month following the death or interest will begin to accrue on the debt. But perhaps more crucially, certain Inheritance Tax exemptions must be claimed within two years of death or you stand to lose the exemption. The following example explains how detrimental a delay could be:

Mr & Mrs Smith have a joint estate worth £1 million. This includes their family home which is worth £600,000. The rest is made up of investments and savings. Mr Smith dies and leaves everything to Mrs Smith.

Two years later Mrs Smith dies and leaves everything to their three children.

Scenario 1 – The Executors deal with Probate in the first year

Mrs Smith’s executors can claim her own individual Nil Rate Band (NRB) of £325,000 which is Inheritance Tax free. As she owns a property and is giving this to her children, the Executors can also claim £175,000 Residence Nil Rate Band (RNRB). Furthermore, as her Husband has died and left everything to her, her Executors are now permitted to claim the same allowances from his estate and apply it to Mrs Smith’s estate

This means Mrs Smith’s Executors have allowances of £1 million to use and provided they declare this to HMRC and claim Mr Smith’s allowances within 2 years of Mrs Smith’s death, there will be no Inheritance Tax to pay.

Scenario 2 – The Executors wait until 24 months have passed to deal with Probate

In this case, the Executors are still allowed to claim Mrs Smith’s NRB of £325,000 and her RNRB of £175,000. However, they are out of time to claim Mr Smith’s allowances. This gives them a total of £500,000 tax free.

The remaining £500,000 is taxable at 40% and this will result in a tax bill of £200,000.

If the Executors are also the Smith children, then they will need to share the liability, but if the Executor is another person (a friend or family member who is not inheriting the estate) they could also be liable for the loss for not dealing with the estate in a timely manner.

We would always recommend that you take advice if the estate is taxable, and you are not familiar with tax law. It is better to spend a little getting timely legal and tax advice in an estate, rather than risk losing a lot. The costs of such advice will usually be met by the estate and could save you a lot of worry.

Please feel free to contact Rachel Saunders at Forrester Sylvester Mackett by email rachelsaunders@fsmsolicitors.co.uk or telephone 01793 522688 and she will be able to offer you further assistance.

The contents of this article are for the purposes of general awareness only. They do not constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

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