To arrive at the amount payable when valuing a deceased person’s estate, you need to include assets (property, possessions and money) they owned at their death and certain assets they gave away during the seven years before they died. The valuation must accurately reflect what those assets would reasonably receive in the open market at the date of death.
Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceased’s estate. The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax – but this is not common.
Valuing the deceased person’s estate is one of the first things you need to do as the personal representative. You won’t normally be able to take over management of their estate (called applying for probate or sometimes, applying for a grant of representation/ confirmation) until all or some of any Inheritance Tax that is due has been paid.
The valuation process
This initially involves taking the value of all the assets owned by the deceased person, together with the value of:
– their share of any assets that they own jointly with someone else
– any assets that are held in a trust, from which they had the right to benefit
– any assets which they had given away, but in which they kept an interest – for instance, if they gave a house to their children but still lived in it rent-free
– certain assets that they gave away within the last seven years
Next, from the total value above, deduct everything that the deceased person owed, for example:
– any outstanding mortgages or other loans
– unpaid bills
– funeral expenses
(If the debts exceed the value of the assets owned by the person who has died, the difference cannot be set against the value of trust property included in the estate.)
The value of all the assets, less the deductible debts, gives you the estate value. The threshold above which the value of estates is taxed at 40 per cent is currently £325,000 (frozen until April 2014).
When the executor pays Inheritance Tax
Usually, the executor, personal representative or administrator (for estates where there’s no will) pays Inheritance Tax on any assets in the deceased’s estate that are not held in trust.
The money generally comes from the deceased person’s estate. However, because the tax must be paid within six months of the death and before the grant of probate can be issued (or grant of confirmation in Scotland), sometimes the executor has to borrow the money or pay it from their own funds. This can happen if it hasn’t been possible to get the money from the estate in time because it’s tied up in assets that have to be sold.
In these cases, the executor or the people who have advanced the money can be reimbursed from the estate before it’s distributed among the beneficiaries.
When a trustee pays Inheritance Tax
Inheritance Tax on transfers into trust is only necessary if the total transfer amount is above the Inheritance Tax threshold. It’s usually payable by the person making the transfer(s) – known as the settlor – not the trustees.
The trustees must pay any Inheritance Tax due on land or assets already held in trust. The occasions for this include:
a transfer out of trust (known as the exit charge)
every ten years after the original transfer into trust (known as the ten-year anniversary charge)
when the beneficiary of the trust (known as the life tenant) dies – interest in possession trusts only
When a beneficiary or a donee has to pay Inheritance Tax
If the executor or the trustees can’t pay the Inheritance Tax, the beneficiaries or donees (recipients of gifts made during a person’s lifetime) may have to pay it. A beneficiary or donee only has to pay Inheritance Tax in this case if:
– they receive a share of an estate after a death
– they receive a gift from someone who dies within seven years of making the gift
– they benefit from assets in a trust at the time of death or receive income from those assets
– they are the joint owner – other than a spouse or a registered civil partner – of a property