Upon a testator’s death, amongst grief, the deceased’s heirs are often faced with a large inheritance tax (IHT) bill to pay prior to the distribution of any inheritance. Although, it is standardised practice that any inheritance tax due is paid by the deceased’s estate, on occasion beneficiaries are liable to satisfy the inheritance tax due before collecting their share of inheritance.
What was first referred to as Probate tax in the 1600s; a fixed fee on all probate valued at over £20 on all estates was later rebranded as Inheritance tax during the late 1700s. Inheritance tax was reformed to gradually increase dependant upon the value of the deceased’s estate. In order to regulate this practice, and to enforce the payment of inheritance tax upon beneficiaries, inheritance tax application forms were introduced to aid the calculations of inheritance tax. Furthermore, penalties we applied to those who failed to pay inheritance tax at the appropriate rate or all together. Sometime after the launch of the digital era, the HMRC developed the online application system to simplify the process of calculating inheritance tax liability.
Initially inheritance tax rates were seen as high as 75% on large estates. Naturally, beneficiaries were not in favour of such a large amount. This figure has since reduced to a standard 40% inheritance tax rate. In order to assist further, in 2006 it was announced that a IHT nil rate band would be applicable to all estates from the year ending 2009/10 for ten years. The IHT nil rate band was set at £325,000 and has remained at this rate since. The nil rate band means that no inheritance is payable on estates up to the value of £325,000. A further residence nil rate band was introduced in 2017 for those leaving their main residence to their children through their will. The current additional residence nil rate band is set at £175,000. In essence this allows for a testator to leave £500,000 to their beneficiaries free of inheritance tax.
The rates for both the IHT nil rate band and the additional residence nil rate band are frozen until 6 April 2026. There is speculation that the freeze may be extended further closer to its existing expiry. The freezes have faced some criticism for not increasing according to the current inflation rates. Effective planning can assist to minimise inheritance tax liability on death and may provide peace of mind.