When somebody dies, usually some or all of the inheritance tax due on their estate must be paid before the executors can obtain a grant of probate. Inheritance Tax is charged at a flat rate of 40% on anything over the tax free allowances for which the estate is eligible, and it has to be paid by the end of the sixth month after the date of death. For example, if a person died during January, the inheritance tax would have to be paid by 31st July that year. If it remains outstanding, interest will start to run. At the time of writing, the interest rate charged by HMRC on unpaid inheritance tax is 7.75% per annum. Funding inheritance tax can be awkward, because it must be done before the grant is issued and the deceased’s property is sold, and many people have the majority of of their funds tied up in their home. However, there are various tried and tested techniques which can be used to fund inheritance tax before probate is granted.
The Direct Payment Scheme
Using form IHT 423 as part of the lengthy and detailed inheritance tax return required in a taxpaying estate, it is often possible to arrange for the deceased’s banks, building societies and even their investment managers to liquidate assets and transfer the funds to HMRC direct to cover part or all of the inheritance tax due. As the payment is made to HMRC’s bank account, the organisations involved can be confident that the payment being requested is legitimate, even without a grant of probate first being obtained. In order to use the Direct Payment Scheme, the executors will need to have obtained an ‘inheritance tax reference’ from HMRC, which takes several weeks – this is the reference that HMRC will use to marry up the incoming funds with the correct estate.
Life Assurance
A life assurance policy is sometimes put in place during the deceased’s lifetime to fund some or all of the inheritance tax due. These policies will usually pay out if a death certificate is exhibited to the insurer, without the need for a grant of probate. This will ease cash flow in the estate, because the money can be used to go towards the inheritance tax due before probate is granted. However, for an older person, the premiums on these policies can become prohibitively expensive.
The Instalment Option
Another way to obtain a grant of probate when not all of the necessary funds are yet available to pay the inheritance tax is to elect for the “instalment option” on the deceased’s property. This involves the executors asking HMRC to agree that the inheritance tax on the property will be paid over a period of 10 years in 10 equal instalments. In the meantime, it will only be necessary to fund the first of the 10 instalments, which makes the figures significantly more manageable, and may mean that the tax can be covered from funds available in the estate. Once probate is obtained and the deceased’s property can be sold, the executors will then simply arrange to pay off the remaining 9 instalments in full, so that interest does not continue to run.
A Loan from the Beneficiaries to fund inheritance tax
If the funds to cover the inheritance tax cannot be found elsewhere, the residuary beneficiaries may decide to use their own personal funds to cover the balance due temporarily, in order to ‘unlock’ the funds due to them from the estate. This may or may not be possible, depending on the beneficiaries’ own resources. It is probably most suitable in an estate with a very limited number of residuary beneficiaries, for simplicity.
An Inheritance Tax Loan
If all else fails and there are still funds to be found, then usually the last-ditch option is for the executors to approach a bank or another commercial provider of inheritance tax loans, and arrange for them to lend the executors the funds to cover the balance due until probate is granted. There are a number of companies that provide this service, although the interest rates tend to be very high and other options are preferable where possible. There is also the fact that – with ongoing delays at the probate registries in the last few years – executors may find that the loan ends up remaining in place for longer than they had hoped, which makes it an unappealingly expensive exercise.
A Grant on Credit from HMRC
Finally, if it is not possible to access the assets in the estate before a grant of probate is obtained, the executors can ask HMRC to postpone payment of some or all of the inheritance tax due until after the grant of probate comes through. This method of funding inheritance tax is called “a grant on credit”. Once the grant of probate is issued, the executors will be expected to pay the outstanding tax due as soon as possible. HMRC may want to place a “notice of an inheritance tax charge” against the deceased’s property, which is an entry on the Land Registry title showing that money is due to HMRC. The executors will be expected to pay as much of the inheritance tax as they can from other sources before HMRC will consider supporting an application for a grant on credit. The executors will be asked to sign an undertaking agreeing to pay the balance of the inheritance tax due within an agreed timescale. If the tax is due to be paid following the sale of the deceased’s property, there must be an accepted offer in place and an estimated date for the exchange of contracts. HMRC will not consider issuing an open-ended undertaking without a clear date when they can expect the tax to be paid.
Chiltern Wills is a will writing business based in Beaconsfield and run by former London solicitor, Rebecca D’Arcy. Call us on (01494) 708688 or email info@chilternwills.com for a free initial discussion about how we can assist you with funding inheritance tax and obtaining a grant of probate.
