Who is responsible for calculating Inheritance Tax and what happens if they make a mistake?
HMRC are investigating 2,000 families for underpaying Inheritance Tax. Learn who is liable for calculating what is owed and what happens if they make a mistake.
Inheritance Tax (IHT) has been dubbed “Britain’s most-hated tax” in the past and it’s becoming more unpopular as it affects more families.
According to the UK government, IHT receipts reached £7.1 billion in the 2022/23 tax year. This is a significant increase on the £6.1 billion paid in the previous year.
IHT receipts are likely rising because the “nil-rate bands” – the amount you can pass on without paying IHT – remain frozen, so don’t rise with inflation over time. Meanwhile, the total value of your assets and possessions may rise as house prices increase and you generate more growth on savings and investments.
As a result, more of your estate could exceed the nil-rate bands, meaning your family could be more likely to pay IHT. If the value of the estate is higher than the nil-rate bands, there is typically a 40% IHT charge on any wealth that exceeds the threshold.
Unfortunately, many families are unprepared for the tricky process of paying IHT and could make mistakes - HMRC are investigating more than 2,000 families in 2024 for potentially underpaying.
This could be because of a deliberate attempt to underpay. Or it might be a mistake when calculating the tax due – after all, the rules are quite complicated. These errors can often happen because the person who’s responsible for calculating IHT doesn’t understand what they need to do or know what they should include in the calculations.
Read on to learn whose job it is to calculate and pay IHT, and what happens if they make a mistake.
The executor of the will must calculate how much Inheritance Tax is due
It’s a common misconception that the beneficiaries of the estate – that is, the individuals who receive money or assets – must calculate and pay IHT. It’s actually the executor’s responsibility (whoever is chosen by the deceased in their will to manage their estate). Executors may or may not inherit part of the estate depending on the deceased’s wishes. They will usually be someone close to the deceased, who they trusted.
When administering the estate, the executor needs to work out how much IHT, if any, is due. They do this by adding up the total value of the estate – including gifts that were given in the last seven years of the deceased’s life – and applying the nil-rate bands.
In the 2024/25 tax year the nil-rate band is £325,000, and everyone is entitled to this allowance. You may also be entitled to an additional £175,000 ‘residence nil-rate band,’ if the deceased has passed a main residence to a direct descendant, such as a child or grandchild.
If an estate is passing from one spouse or civil partner to another, they won’t need to pay any inheritance tax. When the surviving partner then passes away, their estate is entitled to both nil rate bands, because the first partner’s allowance was never claimed. This means that a couple may be able to pass on up to £1 million between them without their beneficiaries facing IHT.
There are also some exemptions to consider. For example, gifts may not be taxable if the person survived for seven years after making them. Money donated to charities or sports teams is exempt from IHT too.
Additionally, there are some less common IHT exemptions that most people don’t know about. For instance, you may not pay IHT on military medals or rare works of art.
These are just some of the many exemptions and complex IHT rules to consider. It’s up to the executor to decide which nil-rate bands or exemptions apply, and what assets they should include in the calculations.
While the UK government does have an online tool to give some guidance, it won’t accurately calculate how much IHT is due.
Inheritance Tax must be paid to HMRC 6 months after the estate is passed on
Once the executor of the will has calculated how much IHT is due, they need to arrange payment to HMRC if there is a bill to settle. They must pay by the end of the sixth month after the person dies.
They normally use funds from the estate to pay the IHT bill. But they can’t apply for a ‘grant of probate’ to prove they have the authority to administer the estate until they pay the IHT.
This could leave the executor in a difficult position if they don’t have the money to pay the IHT bill without accessing the deceased’s estate first. In this case, they may need to obtain a “grant on credit” from HMRC. This essentially allows them to apply for probate on the agreement that they will use funds from the estate to pay the IHT when they can access them.
Previously, executors were required to look for commercial loans to pay the bill first, and only if this wasn’t possible would they be given a grant on credit.
Luckily, in the 2024 Spring Budget, the chancellor announced that this would no longer be the case from 1 April 2024 and executors can now apply for a grant on credit immediately.
HMRC could apply fines if the executor makes mistakes when calculating and paying IHT
Most executors aren’t tax experts so it’s easy to make errors when calculating IHT. Common mistakes include:
Undervaluing property
Failing to understand nil-rate bands and IHT exemptions
Missing certain accounts or investments
Failing to include gifts made in the seven years before the death
Not providing adequate records to HMRC.
In some cases, if the executor isn’t properly briefed on the role, they might not realise they have to calculate and pay IHT at all.
HMRC treats every case differently and they typically need to decide if the executor has ‘taken reasonable care’ when making their calculations. So, if the executor makes a genuine error on the paperwork, there may not be any penalties to pay.
However, if HMRC believe the executor has deliberately omitted or undervalued assets, or hasn’t taken enough care, they might be fined. The fines can be as much as 100% of any unpaid tax that the estate owes once HMRC corrects the mistakes.
Penalties also apply if the executor misses the six-month deadline for filing a return and paying the tax. The initial fine is £200 with additional charges applied each month once the IHT is a year late. The amount differs depending on the value of the estate.
You may need to seek professional advice to help you understand how penalties are calculated and applied because the rules can be very complicated.
The executor is liable for paying any penalties, even if they don’t inherit anything from the estate. That’s why it’s so important to be accurate with the calculations. If you’re chosen as the executor of a loved one’s will, it may be useful to discuss this with them soon so you know where all the relevant paperwork is. You might need to familiarise yourself with the rules too.
How can professional advice help?
If you’re planning to pass on an inheritance of any kind, the team at Four Pillars can help you plan tax efficiently, and provide information about previous investments, so there’s no surprises when it comes to calculating the value of your estate.
You may also benefit from a solicitor, who can help to calculate and pay any inheritance tax that is due.
Your executor is likely to be someone close to you, so make arrangements to ensure this process is as simple as possible when the time comes. It’s important that you introduce your executor, and any loved ones, to us in advance so that everyone is aware of the plan for your estate.