Inheritance Tax (IHT) Guide to Completing Forms

What is Inheritance Tax (IHT)?

Inheritance Tax (IHT) is a tax applied to the estate (property, money, and possessions) of someone who has passed away. In the UK, there is typically no tax payable if:

• The estate is valued below the current £325,000 threshold (the “nil rate band”).
• The estate is left to a spouse, civil partner, or a charity.

For estates above the threshold, a 40% tax is usually applied to the portion exceeding the £325,000 limit. However, various reliefs and exemptions can reduce this, such as the residence nil-rate band (RNRB), allowing an additional £175,000 if a home is passed on to direct descendants.

Why is Completing IHT Forms Important?

Even if no tax is due, it’s essential to submit the correct forms to HMRC. Failure to do so could lead to delays in probate, fines, or additional complications. Executors, or those handling the estate, are legally responsible for ensuring the accuracy and timely submission of these documents.

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Key Inheritance Tax Forms You Need to Know

Depending on the estate’s value and situation, different forms are required:

1. IHT205: This is used when the estate is below the IHT threshold and there is no tax to pay. If the estate qualifies as an “excepted estate” (a simpler estate), you must complete this form. An excepted estate typically means:
   • The estate is below the £325,000 threshold, or
   • The full estate is being transferred to a spouse or civil partner.
2. IHT400: If the estate’s value exceeds the £325,000 threshold or tax is due, the executor must complete this form. It is used to calculate the estate’s value and report the tax due. Additionally, it covers complex reliefs such as business property or agricultural relief.
3. IHT421: After filing the IHT400, HMRC will issue this form to confirm that all taxes are paid. The probate office will require this document before issuing a grant of probate.
4. IHT402: This form is used when transferring any unused nil-rate band from a deceased spouse or civil partner to reduce the tax burden on the current estate.
5. IHT403: This supports the IHT400 and deals specifically with gifts made by the deceased in the seven years before their death, which could be liable for tax.
6. IHT100: This form is used for certain chargeable lifetime transfers, usually when someone places significant assets in trust while still alive.

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Step-by-Step: How to Complete the IHT Forms

Step 1: Gather Information

You will need detailed information about the estate, including:

• The total value of assets, such as properties, bank accounts, investments, and personal possessions.
• Outstanding debts, including mortgages, loans, or other liabilities, which can reduce the estate’s taxable value.
• Lifetime gifts made by the deceased that may still be liable for tax.

Step 2: Choose the Correct Forms

Determine whether the estate qualifies as an excepted estate (use IHT205) or if the value exceeds the tax-free thresholds (use IHT400). Additionally, check if there are other complexities, such as trusts or gifts that need further forms like IHT403.

Step 3: Complete the Forms Accurately

Fill in each section carefully, ensuring that all assets, debts, and any other relevant details are accounted for. HMRC can impose penalties for inaccuracies or deliberate misrepresentations.

Step 4: Submit and Pay

Once the forms are complete, submit them to HMRC along with any Inheritance Tax due. Payment can be made in several ways, including installments for certain types of assets, like property. HMRC must receive this within six months of the death, or interest will start accruing on the outstanding tax.

Step 5: Obtain a Grant of Probate

If IHT is payable, HMRC will issue Form IHT421, allowing the executor to apply for probate. Probate gives you the legal authority to manage and distribute the estate according to the will.

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Important Considerations

Potential Tax Exemptions and Reliefs

• Spousal Transfers: There is no Inheritance Tax if the estate passes to a spouse or civil partner, regardless of value.
• Charitable Donations: Leaving at least 10% of the estate to charity can reduce the IHT rate from 40% to 36%.
• Agricultural or Business Property Relief: If the deceased owned a farm or business, you might be eligible for relief, significantly reducing the taxable value of the estate.

The Residence Nil-Rate Band (RNRB)

Introduced to allow estates to pass on property to direct descendants, the RNRB can increase the tax-free threshold by up to £175,000. This is only available if the property is passed to children or grandchildren. Keep in mind that this relief tapers for estates valued above £2 million.

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Common Mistakes to Avoid

• Undervaluing Assets: Be thorough when calculating the value of the estate. If HMRC finds discrepancies, you may face penalties or delays.
• Missing Deadlines: Probate cannot proceed without the correct forms, and interest on unpaid tax starts accruing after six months.
• Neglecting Gifts: Remember that gifts made within seven years of death may still be subject to Inheritance Tax, especially if they exceed the annual gift exemption limits.

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Expert Assistance with Inheritance Tax Forms

Handling an estate can be complicated, and Inheritance Tax can add stress to an already challenging situation. At TaxAgility, we provide expert guidance to ensure that the correct forms are submitted promptly and accurately. Our experienced team can help you navigate IHT complexities, calculate the correct tax due, and explore ways to minimize your liability.

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Conclusion

Inheritance Tax is one of the most complex areas of estate management, and correctly completing the required forms is essential to avoid unnecessary delays or penalties. Whether the estate is small and simple or large and complex, understanding which forms are necessary and how to complete them will ensure that the probate process runs smoothly. If you’re unsure about any part of the process, professional advice is always available to assist you.

For more information or assistance, contact our IHT specialists today.