Generally, IHT will be handled by an executor of a will or an administrator of the estate. The IHT can be paid from funds within the estate, from money raised from the sale of the assets or through the Direct Payment Scheme (DPS). However, if the estate can’t or simply doesn’t pay IHT then the burden may fall onto those who are inheriting the assets.
The government provides this example to illustrate how it could work:
Sally died on 1 July 2018. She was not married or in a civil partnership when she died. Sally left 3 gifts in the 7 years before her death:
£300,000 to her brother 6.5 years before her death
£50,000 to her sister 4.5 years before her death
£150,000 to her friend 3.5 years before her death
Sally is not entitled to any other gift exemptions or reliefs.
There’s a £325,000 inheritance tax threshold. Anything below this amount is tax free. £300,000 is used up by the gift Sally gave her brother. There’s no tax to pay on his gift. The remaining £25,000 is used up by her £50,000 gift to her sister. There’s tax to pay on the amount not covered by the threshold.
That means there’s tax to pay on £25,000 of the gift to Sally’s sister at a rate of 24%. The £150,000 gift given to her friend is taxed at a rate of 32%. Sally’s remaining estate was valued at £500,000 and charged at the usual 40% inheritance tax rate. Sally used up the tax-free threshold on gifts given before her death.
For joint tenants, the deceased person’s assets will automatically be inherited by the other tenant. The remaining tenant may have to pay IHT if the whole of the deceased’s estate if worth more than the £325,000 threshold and the estate itself cannot pay.
For tenants in common, IHT may have been paid on the deceased’s share of assets over £325,000. In most cases, the executor or administrator of the estate will pay the IHT out of the estates assets. However, if the estate doesn’t have enough money to pay the IHT on the deceased’s share of the assets, or the executor doesn’t pay, the remaining tenant in common will need to pay it. This could mean needing to sell existing shares or property to cover the debt.
The rules for how IHT is paid by an estate and/or inheritors can be complicated. Generally however, HMRC will contact anyone who needs to cover an IHT bill. The government can also be contacted for help on IHT, for particularly complex estates they advise seeking help from professional tax advisors or solicitors.