Inheritance tax is a tax on the estate of someone who has passed away. It is important to understand when this tax is due in order to properly plan for the distribution of assets and avoid any penalties. Here, we will provide information on when is inheritance tax due and what steps you can take to ensure that you are in compliance with the law.
When is inheritance tax due?
“When is inheritance tax due?” is a common question which we answer for our clients.
If it is payable, inheritance tax is normally due at the end of the sixth month following a person’s death. So if someone died in November, the inheritance tax would become due on 31 May the following year.
This should allow you (as an executor) the time you need to value the estate and calculate what is owed to HMRC. If you pay later, interest will also be payable.
Sometimes, though, estates are more complicated and may take longer to value. In these circumstances, you can make a payment on account prior to the deadline to help manage the interest payments.
If the inheritance tax is due on a transfer into or out of a trust, then it should be paid no later than six months after the end of the month that the transfer was made.
The inheritance tax process
But if the payment represents the end of your process with HMRC, what about the beginning?
If inheritance tax is going to be due, you will need to report the estate and its value to HMRC using form IHT400. This must be done within 12 months of a person’s death.
Separately to this, before you can even make a payment of inheritance tax to HMRC, you will need a payment reference number. This must be acquired at least three weeks before a payment is made, and can be done online or by post (using an IHT422 form).
Once your reference number is received and three weeks have passed, then you can technically make a payment. This could be a payment on account if you don’t know the exact amount due, or the full amount.
Paying inheritance tax
There are numerous ways of making payments including rather obscure methods like using British Government stock or by transferring national heritage property.
But for most people an online, telephone or cheque option will be most appropriate. It is also possible to pay in your bank or building society or via the deceased’s bank account.
Who pays if inheritance tax is due on gifts?
Gifting is a popular way of reducing an estate, as long as the gifts are compliantly made seven years or earlier before death. At this point they fall beyond the scope of inheritance tax.
If, however, inheritance tax is due on gifts because the deceased died within seven years of the gifts being made, then in the first instance this should be paid by the recipients of the gifts. Should the recipients be unable or unwilling to pay, then the liability will fall on the estate.
What if the assets are illiquid or are to be retained?
Sometimes it may be difficult to raise a cash value from the estate to pay the inheritance tax liability. This could be because the assets are illiquid or they are tied up in, say, a family home or certain company shares which the beneficiaries do not wish to sell.
In these circumstances, it is possible to pay the inheritance tax due (plus interest) over a ten-year instalment plan. The first payment is still due at the end of the sixth month after the death. This then becomes known as the due date and payments are made every year on this date. You can still pay off the full tax amount and interest early, should circumstances change.
Do you have another question?
Hopefully we have helped with the question, “When is Inheritance tax due?”. We are here to help with all wills and probate matters. So if you have a question, please do not hesitate to get in touch and we will assist.