Inheritance Tax is payable in the United Kingdom when someone dies, and their estate exceeds the available tax-free allowances. The Estate is unable to be distributed to beneficiaries or completed until the tax has been paid.
One of the questions we are asked by executors is what happens if there is not enough money in the estate to pay the inheritance tax, for example, there are no available cash assets. It is important for executors to understand the implications of delaying payment of inheritance tax and the available options to assist with managing this situation.
How does inheritance tax work?
Inheritance tax is usually charged at 40% on the value of an Estate above the available threshold. The current threshold (known as the nil rate band) is £325,000. There are also additional allowances which increase this threshold such as the residence nil rate band and transferable nil rate band.
Interest does not start to accrue on inheritance tax until six months after the date of death. The persons’ appointed within a Will to manage the Estate and pay inheritance tax are known as executors. The responsibilities of an executor include but are not limited to;
- Ascertaining the value of the Estate – assessing the value of all assets to include property, bank accounts, shares, investments, personal effects and liabilities.
- Inheritance Tax – completing the Inheritance Tax account IHT400 determining the amount of Inheritance Tax payable based on the value of the Estate above the available threshold and any applicable allowances.
- Inheritance Tax – arranging payment of the Inheritance Tax before the Estate is distributed to the beneficiaries.
What if there are insufficient funds to pay inheritance tax?
The usual process would be to use the deceased’s cash assets in the first instance to pay the inheritance tax. If the Estate does not have sufficient liquid assets to cover the inheritance tax bill this can be challenging, however there are a number of options available to executors to resolve this issue:
- Direct payment schemes – most banks and financial institutions offer a direct payment scheme, allowing inheritance tax to be paid directly from the deceased’s bank account without waiting for probate.
- Instalment payments – HM Revenue and Customs allows for an instalment option on certain assets such as property. The first instalment must be paid by the end of the sixth month after death and can then be paid in a further nine annual instalments. Interest is charged on the outstanding amount.
- Loans – executors can take out an executors’ loan to pay the inheritance tax and this is secured against the deceased’s assets. This can often be a viable option if immediate funds are needed but will incur interest and should be carefully considered by the executors.
- Sell assets – executors may need to sell assets in the Estate to raise funds. This could include selling investments or personal effects and even property.
Given the complexities involved in managing an estate and certainly in cases where inheritance tax is payable, it is important to seek professional advice.
Probate solicitors can assist with the legal process to include applying for probate, managing the sale of assets and ensuring compliance with tax regulations and arranging payment of inheritance tax.
Financial advisors can assist in structuring your Estate during your lifetime to minimise an inheritance tax liability and also advise on options for tax in the future.
Tax advisors can offer advice into potential reliefs and exemptions to try and reduce the overall inheritance tax burden and also on which investments to sell or retain with reference to inheritance tax liability.
If you are an executor and require legal assistance in obtaining a grant of probate, paying inheritance tax, or if you would just like to speak to a Probate Solicitor, please call us on 01279 295047 or complete our enquiry form and we will be in touch.