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Which tax forms do I complete when applying for probate? |
The tax form you are required to complete largely depends on the value of the estate. If the estate is an ‘excepted estate’, HM Revenue and Customs (HMRC) form IHT205 must be completed. The estate may be an excepted estate if its value is less than the Inheritance Tax (IHT) threshold, currently £325,000, or if the deceased’s spouse died before the deceased it is possible that up to a maximum of double the IHT threshold can be used in the IHT calculations. Where it is likely that IHT is due, HMRC form IHT400 needs to be completed. Please note, however, that this is only a brief guide and there may be other factors relating to the estate that could mean that you will have to complete other forms. Please consult a solicitor for further advice.
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How do I calculate the Inheritance Tax liability? |
The first step is to identify the estate. This is all of the property which the deceased was beneficially entitled to. It could include gifts made, if the gift was made within the last 7 years of the deceased’s life.
The next step is to value the estate. This is the current market value of all the deceased’s assets
minus the funeral expenses and any debts.
You then apply any relevant exemptions, the most common of which are gifts to charity and
property passing to a surviving spouse.
The usual rule is that if the estate exceeds £325,000, Inheritance Tax (IHT) must be paid at 40%
above this figure, unless your spouse predeceased you and left all of their assets to you, in which
case IHT is payable at 40% on assets above £650,000 on the second death. Please note that in
addition to the usual rule, there are various exceptions. Please consult a solicitor for further advice.
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What is Inheritance Tax? |
Inheritance Tax (IHT) is a tax on the assets of a person who has died. IHT is paid out of the estate before it is distributed to the beneficiaries. Most estates do not have to pay IHT as they fall under the threshold or nil rate band of £325,000.
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When is Inheritance Tax payable? |
The usual rule is that if the estate exceeds the Inheritance Tax (IHT) threshold of £325,000, IHT
must be paid at the rate of 40% of the estate value exceeding the threshold unless the balance has been bequeathed to the surviving spouse. In the case of the latter no IHT is paid until the surviving spouse dies when the amount due in IHT will be 40% of the balance of the estate above £650,000. Please note that in addition to the usual rule, there are various exceptions. Please consult a solicitor for further advice. When due, the IHT must be paid within 6 months of the last day of the month in which the person died. If the IHT is a large sum, it is possible to pay it in instalments.
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Which taxes does an executor need to consider? |
The executor of the deceased’s estate must consider the following taxes:
• Income Tax • Capital Gains Tax; and
• Inheritance Tax
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What is a deed of variation? |
A deed of variation is a document which varies the terms of the deceased’s will. This is ordinarily a direction by a beneficiary to the executors to transfer all or some of the property to a particular
person or persons (the recipient). The recipient does not have to have been a beneficiary under the original will. You can enter into a deed of variation under any circumstances, provided it is done within 1 year of the testator’s death.
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What is a trust? |
A trust is where one or more people (there is a minimum of two people if the trust contains
property) known as trustees legally own an asset (which can be money or property etc.) for the
benefit of someone else (the beneficiary). The trustees can only use the assets contained in the trust for the benefit of the beneficiary.
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How can I avoid Inheritance Tax? |
You can take your estate out of Inheritance Tax (IHT) by reducing the size of it. One way to do this is to make lifetime gifts. A gift may attract IHT, however, if it is made less than 7 years prior to your death. You could also consider making gifts which fall into the lifetime exemptions category for IHT purposes, such as the annual gift exemption (transfers of up to £3,000 in each tax year are exempt), the small gifts exemption (a gift of less than £250 to any one person in a tax year is exempt) and gifts in consideration of marriage or civil partnership: £5,000 made by the person’s parent; £2,500 made by the person’s grandparent; and £1,000 made by anyone else. These will reduce your estate but will not attract IHT.
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