Inheritance tax paperwork is the last thing you want to worry about when a loved one dies.

When you’re already grieving for a recently departed family member, complicated inheritance tax paperwork is yet another burden.

However, thousands of families every year are filling in forms that they could avoid.

In today’s article, we’ll explain how you can simplify the administrative burden. If you’d like to read our other articles on the topic, check out our inheritance tax archive.

Inheritance Tax Basics

If someone dies and their estate is worth more than £325,000, there is a potential inheritance tax liability (at 40%).

In this case, the executors have to fill in a paper-based form, called Inheritance Tax account (IHT400), with the details.

If the estate is worth less than £325,000, you don’t have to pay any inheritance tax. In this case, you just have to fill in a form online. It’s much shorter and simpler than the complicated IHT400.

Inheritance Tax Exemptions

Just because the estate is worth more than £325,000 on paper, it doesn’t mean you are definitely due to pay inheritance tax.

There are a number of ways you can use exemptions to reduce the value of the estate (for inheritance tax purposes):

  • Spouses: you can pass your assets tax-free to your husband or wife when you die
  • Married Couples: the combined “nil rate band” is £650,000 (ie double that of an individual)
  • Residence Nil Rate: £150,000 is currently taken out of the value of your “main residence” for IHT purposes

So you apply these exemptions, and the estate is then worth less than £325,000. Does this mean you can then avoid having to fill in IHT400?

Excepted Estates

Not quite!

There is a third form for inheritance tax called the IHT205 form for “excepted estates”. This (like the online form) is much simpler than IHT400.

However, it’s an open question at the moment if the exemptions above meet the strict HMRC definition of excepted estates. Some estates are indeed “non-taxpaying” while not considered “excepted”.

Confused! You’re not alone. In fact, HMRC has already been petitioned by the Office of Tax Simplification to streamline the rules and provide more guidance.

Which Form To Use?

A recent Freedom of Information request revealed some interesting data about inheritance tax paperwork. In tax year 2017:

  • 49,500 IHT400 forms were completed
  • 43% of which resulted in no tax charge

Some of these applications would still have been correct in using IHT400. As we explained, not all non-taxpaying estates are exempt. However, a lot of people are using the more complex IHT400 form when they could have used IHT205 or even the online form.

If you’re not sure which form to use, it might be worth working with an accountant or tax expert. As well as saving you time and hassle, they may also be able to save you money off your eventual IHT settlement.

There’s also the chance that the IHT rules change soon. We are due in budget in March and IHT reform has been suggested as a popular idea. So, whatever you decide to do, make sure you stay on top of the latest developments.

If you’d like to discuss any aspect of inheritance tax with our expert team, please get in touch.

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