Probate and Estate Administration specialist Sarah Hickson answers one of the most common questions asked by personal representatives, “How do I pay Inheritance Tax?”
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Inheritance Tax (IHT) is a tax on the value of your estate when you die. Currently, the IHT threshold (nil rate band) in England is £325,000, meaning there is no IHT to pay if the total value of your estate is less than that. IHT is payable on the amount exceeding the nil rate band unless exemptions or the residence nil rate band apply.
With a 40% standard rate of Inheritance Tax, it’s easy to see how the amount of tax payable can be substantial.
See how Inheritance Tax planning can save your estate thousands of pounds.
Who is responsible for paying Inheritance Tax?
Your executors (or administrators if you die without a Will) are responsible for paying any IHT by the end of the sixth month following your death. After that, interest begins to run, currently at 7.75%, and fines are possible. Although IHT is payable from your estate’s assets, there is potentially a ‘chicken and egg’ situation for your executors.
IHT is payable on submitting the IHT account to HMRC. If the IHT liability remains unpaid, HMRC does not allow the Probate Registry to release a grant of probate. And without a grant of probate, your executors cannot administer the estate. So, with estate assets essentially frozen until your executors receive a grant of probate, how do they pay the IHT?
How do I pay Inheritance Tax?
The executors’ options on how to pay any IHT due are pretty limited. The main ones are:
Inheritance Tax Direct Payment Scheme
Under what is known as the Direct Payment Scheme, your executors can ask a bank, building society or National Savings & Investments to pay some or all the IHT due from your frozen accounts to HMRC.
Personal bank loan
Your executors can apply for a bridging loan, commonly called a ‘probate loan’, until probate is granted. They repay the loan once estate assets are available. Probate loans can also help pay your estate’s expenses, such as funeral costs and property maintenance.
Paying Inheritance Tax by instalments
HMRC allow your executors to pay IHT in ten equal annual instalments on certain estate assets, namely:
- Real property, ie land and buildings.
- Business assets.
- Shares giving complete control of a company.
- Certain unquoted minority shareholdings (subject to specific criteria).
However, the first instalment remains payable by the end of the sixth month following your death and before the issue of the grant of probate.
Although the payment by instalments option can be attractive, it’s important for executors to understand that interest accrues in some situations:
- If the instalments relate to shares or business assets, interest arises on late payment of an instalment.
- For real property, instalments carry interest from six months following your death until the full IHT liability is settled, even if all instalments are paid on time.
Unsurprisingly, although many executors opt for the instalment option to obtain the grant of probate, most pay the balance of IHT as soon as possible to minimise interest accrual. Indeed, mitigating interest is a key consideration in an executor’s duty of care to the beneficiaries.
When an estate asset is subject to Inheritance Tax by instalments, the full IHT on that asset is payable at the point of sale.