What Expenses Can I Claim Against Inheritance Tax UK?
Inheritance tax is a tax charged on the value of a deceased person’s estate above a certain threshold. For the 2023/2024 tax year in the United Kingdom, inheritance tax is applied to estates valued over £325,000*. Any amount over this threshold will normally be taxed at 40%. However, there are certain costs and expenses related to administering the deceased person’s estate that can be deducted from the total value before the inheritance tax is calculated. Claiming these allowable expenses and reliefs is an effective way to reduce an estate’s inheritance tax liability.
When a person passes away in the UK, their assets form their estate. This may include their home, savings, investments, pensions, cars, jewellery, and personal belongings. The first step for inheritance tax purposes is to calculate the total gross value of the deceased’s worldwide estate. The next step is to deduct any debts, liabilities, reliefs and exemptions that apply. Allowable expenses cover several categories as outlined below.
Reasonable funeral expenses for the deceased can be deducted from the estate. This includes essential costs such as funeral director’s fees, cremation or burial costs, medical fees for determining death, and travel costs for the funeral. Extra funeral expenses may be allowed depending on individual circumstances. Keeping invoices, bank statements and receipts as proof is advisable. Money given as charitable donations in memory of the deceased would not count as funeral expenses.
Expenses involved in administering and finalising the deceased’s estate can reduce inheritance tax liability. These administration costs may cover solicitor’s fees for probate tasks, valuations of assets, costs of distributing assets to beneficiaries, maintenance costs for a property kept in the estate, and insurance premiums to cover property risk. Administration expenses must be reasonable and essential for settling estate matters. As with funeral costs, it is important to retain invoices and payment proof.
Debts Owed by the Deceased
Any outstanding debts the deceased owed such as utility bills, credit card balances, loans or mortgages can be deducted from their total estate value for inheritance tax purposes. Debts that are written off or released after the person’s death do not count. To successfully claim debts against inheritance tax, executors will need documentation showing money owed by the deceased.
Liabilities on Gifted Assets
In some situations, assets within an estate may come with certain liabilities attached to them that can be claimed for tax relief. For example, with a gifted property, outstanding mortgage payments or secured loans can be deducted by whoever inherits the property. Capital gains tax may also apply if the property value increased substantially since the initial purchase. Executors should investigate liabilities related to estate assets to utilise available inheritance tax relief.
Under business relief rules for inheritance tax, a business or interest in a business belonging to the deceased can qualify for either 100% or 50% relief. A claim can potentially write off a sizeable portion of estate value for tax purposes if business assets meet the detailed criteria. The rate of relief depends on the type of business interest held. Many small business owners can benefit from this relief in their estate planning.
Similarly, agricultural property such as working farms left in an estate can qualify for agricultural relief from inheritance tax at either 100% or 50%. If farmland or pastures exceed certain size and usage thresholds then this relief allows executors to pass on the agricultural asset with a reduced tax payment. Professional advice helps maximise the use of this relief for landowners and farmers.
Fall In Property Values
If property prices fall significantly between the date of death and the final estate valuation, the reduction in value can be claimed as a loss. For example, if a house was worth £200,000 at the time of death but valued at £180,000 six months later, the £20,000 loss could reduce the inheritance tax owed. Regular property valuations help evidence this reduction in value for tax relief claims.
Making certain lifetime gifts and charitable donations can also decrease an estate’s inheritance tax bill. Tax-free small gifts up to £250 per year to any number of people are exempt in addition to gifts made out of regular income and annual wedding gifts. Larger tax-free gifts may be possible depending on specific conditions. Tax relief also applies to donations made to qualifying charities and political parties in the UK and EU.
Review Estate Expenses Regularly
The list of allowable estate expenses that can be deducted from inheritance tax liability is extensive. Rules change periodically so reviewing deductions regularly is good practice, especially for high-value estates. Maintaining thorough financial records also helps executors prove and justify expense claims to HMRC tax inspectors. Specialist legal, tax and financial advisers offer guidance on compiling estate expense forms.
Applying for the full range of available inheritance tax reliefs and exemptions is highly advisable for all estate administrators. Small details could make a substantial difference to the eventual tax bill. Seeking professional assistance ensures executors follow proper procedures and meet HMRC deadlines. With extensive estates, even relatively minor expense deductions could lead to significant tax savings that then benefit chosen beneficiaries.
In conclusion, administering an estate and navigating inheritance tax UK affairs is often complex for grieving families. However, understanding key allowable expenses around funeral costs, administration fees, debts, property values and business assets means executors can work to minimise tax owed. Keeping clear records and being methodical in making claims is vital. For more tailored advice on an estate’s specific situation, consulting specialist inheritance tax advisers or solicitors is always recommended. With the appropriate inheritance tax planning and financial strategy, families dealing with bereavement can reduce stress and use allowable expenses to ease their tax bills at an already difficult time.