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Inheritance in the UK: how it works 

People pass away and it is not something you can always predict. After the funeral, when everything settles down, it is time to think what is going to happen with the deceased person’s estate? This article will shed some light on the basic principles of the UK inheritance laws.

Principle 1. Tax status of the deceased will affect whether the estate will include their UK assets only or all their assets worldwide

Here we are talking about domiciled status of those who were born in the United Kingdom or deemed domiciles who have been tax resident in the UK for at least 15 out of the last 20 years. Their estate will consist of real estate, bank accounts and other assets all over the world.

In all other cases we would be speaking about non-domiciles, also called non-doms, who were born outside the UK and who in the last 20 years have lived in the UK less than 15 years. Their estate will comprise only UK-based assets.

Principle 2. UK inheritance tax is currently 40%, but there are exceptions to this rule

For example, a spouse inherits the estate tax-free. All other heirs will have to pay the inheritance tax on their share of the estate before its distribution. However, good news is, first £325,000 of the assets is an untaxed allowance. Add to this another £100,000 that would be deducted from the value of inherited property.

If the estate passes in its entirety to a spouse, the deceased partner’s allowance also passes to the bereaved partner and is added to the latter’s allowance. In this case, when both spouses pass away, their kids can be entitled to as much as £850,000 of untaxed allowance applicable to the inherited estate.

Principle 3. If you receive an expensive gift, be grateful to the giver. At least for the next 7 years

British laws do not consider gifts over £3,000 made by the deceased during the last 7 years of their life a property of the beneficiary. Gifts made seven and more years before death are no longer on the radar of the British taxman. Let us explain.

If a giver dies within 3 years of making a gift, the recipient must pay the full inheritance tax of 40%. Starting from the third year, each year reduces the tax you must pay on the expensive gift by 20%. So, the bigger the gap between the gift and the sad event, the less tax you have to pay. If it is 4 years, the IHT tax will be 32%, 5 years – 24% and so on.

Case study

A wealthy man living permanently in the UK has a grandson who graduates from the university with flying colours. To acknowledge his great achievement, the granddad gives the young man an expensive sports car. Sadly, this generous man passes away two years later. The bereaved grandson must pay 40% inheritance tax on the value of the car.

Principle 4. If there is no will, UK laws distribute the estate between the immediate family members: spouse, children, grandchildren and great grandchildren

For your convenience, we have compiled a table showing how the estate would be distributed in case of no will.

Estate / pre-conditionHeirsInheritance
Under £250,000SpouseWhole estate
Over £250,000SpouseWhole estate
Over £250,000SpouseAll personal belongings, first £250,000 of the estate and 50% of the remaining estate
Children50% of the estate after deducting personal belongings and £250,000
Any amount, only survivors are childrenChildrenEstate is equally distributed among children
Any amount, only survivors are grandchildrenGrandchildrenEstate is equally distributed among grandchildren
Any amount, only survivors are great grandchildrenGreat grandchildrenEstate is equally distributed among great grandchildren
No children, grandchildren or great grandchildrenGovernmentWhole estate goes to the state

You must have noticed that there is nowhere in the table where friends, distant relatives or business partners are mentioned. Neither are unmarried partners who did not want or manage to register their relationships. That is why, in order to make sure that your estate will end up where you intend it to, it is advisable to make a will. It is a sensitive and delicate issue for many of us, but by doing it you will make life easier for those you love.

Principle 5. When a person dies, all their assets are frozen. However, many banks could be very understanding and unfreeze some money for the relatives to be able to pay for immediate expenses, e.g. funeral

The United Kingdom, like many other countries, has straightforward inheritance procedures and practices. You will only have the right to deal with the estate of a deceased person after applying for and having been granted a probate, if there is a will. In case of no will, you must wait for a court to give you letters of administration.

This is not the end of the story. You must prepare all the paperwork for the court, arrange for valuation of the estate and file a tax return. You will only come into an inheritance once the inheritance tax is paid and there are no other tax debts. In the worst-case scenario, the whole process might take months or years.

To eliminate any stress and reduce the tax burden, get in touch with experienced lawyers. Our consultants have been dealing with inheritance cases for many years.

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