by Richard Dyson 19 August 2015
As if it’s not bad enough when someone dies, the family can be put in a position where they have to pay the inheritance tax before the estate is settled, so there’s no money to pay it!
“My father died at the beginning of the year with an estate valued at around £1m made up of property, shares and savings. I’m my father’s executor and one of the main beneficiaries, along with my siblings. The IHT is now due but probate hasn’t been granted and so I don’t yet have access to his money. Is this right? How am I supposed to pay the tax if I can’t get my hands on the money?”
CR, by email
Inheritance tax is due when an estate (including property is worth more than the allowance (or nil rate band) of £325,000 (£650,000 for a married couple, which applies at the death of the second spouse). Above that level, estates are taxed at 40pc.
Tax is due at the end of the sixth month after someone’s death. If someone dies in January, tax is due by July 31.
When someone dies, the executor values the estate and reports to HMRC. The tax should then be paid when due. HMRC issues a receipt which is required as part of granting probate, but only once it has received the tax. Only once probate is granted can the assets be distributed.
Emma Myers, Head of Wills and Probate at Saga Legal Services explained: “It’s a catch-22: tax needs to be paid; but the money from the estate isn’t available to pay the tax until the tax is paid.”
Gary Rycroft, a solicitor and member of the Law Society’s Wills committee, said: “The Government understandably wants to get its share before the assets are distributed. But it does create cashflow problems for executors and families.”
What you can do to settle the bill
It’s OK where the estate includes cash savings sufficient to settle the bill, as the executor can set up a payment directly from the bank holding the cash to HMRC. “This is the norm where there is enough cash,” said Tina Riches, partner at accountant and financial services group Smith & Williamson.
“A ‘direct payment scheme’ means the money goes straight to HMRC, rather than through the executor or any other party.”
Where there isn’t enough money, executors can either pay with their own money (if they can) and recoup the money from the estate after probate – or take a loan from a bank.
“Banks are usually geared up to offer loans in these circumstances,” said Ms Riches. “The banks can satisfy themselves that there are assets.”
What happens where much of the estate is made up of property or shares?
Shares and property, along with the rest of someone’s estate, are valued at the point of the owner’s death. Tax, where due, is calculated on that amount.
With property, you can elect to pay the tax in instalments.
Gary Rycroft said: “It’s not widely known but IHT on real property can be paid by instalments over a period of up to ten years.
“So if, for instance, you want to retain land or buildings you’ve inherited you might choose the instalment route as a way of making the tax more affordable.” Interest applies to the outstanding tax.
Where much of the estate is in the form of shares executors face similar difficulties – particularly as they can’t sell the shares without a Grant of Probate.
“In one case I dealt with a large estate where almost all the value was in shares,” Mr Rycroft said.
“We negotiated a special arrangement with HMRC whereby the executors pledged to inform HMRC of any share sale and make the payment of IHT the priority in terms of distributions. On that basis they agreed to allowing a Grant of Probate to be obtained ‘on tick’, as it were.”
But he stressed this kind of one-off arrangement would have to be agreed with the Revenue on a case by case basis.
This can be a really difficult situation, so it’s worthwhile taking a few steps in advance to make sure your family aren’t put in this position at what will probably be a difficult time anyway.