Paying Inheritance Tax Bills: The Cure and the Cause?
Read time: 3 minsThis blog examines the challenge of paying Inheritance Tax (IHT), where the very assets triggering the liability are also required to settle it. The article explains how direct payment schemes with financial institutions have largely alleviated this issue for liquid assets. However, complexities remain when estates are predominantly composed of property, requiring alternative approaches such as HMRC instalment options, grant-on-credit arrangements, and solicitor’s undertakings.
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Sometimes it’s possible that the cure for something is also the cause. And when it comes to Inheritance Tax bills this is often the truth. The estate assets are such that an Inheritance Tax (IHT) liability has arisen, i.e the ‘cause’… and the ‘cure’? The estate assets.
In times gone by, the personal representatives of a deceased person’s estate would find themselves in an insoluble position. As the financial institutions, who would be invariably holding the estate assets/money, would not release any money until the personal representatives produced a Grant of Representation (this is an umbrella term for either a Grant of Probate, i.e put simply, if there were a valid Will, or a Grant of Letters of Administration, if there were no valid Will).
However, a Grant would only be issued once the IHT had been paid. It was an undesirable position to be in, so, unless the personal representatives could fund the IHT themselves (and let’s not forget first and foremost the IHT liability of an estate is that of the personal representatives), they would have to look into the possibility of procuring a personal representatives’ loan, and typically the interest rate would not be commercially favourable.
Financial institutions will generally release funds, prior to the Grant being produced, if it is for the payment of IHT. Indeed, there is now a direct payment scheme, in which the banks can pay the IHT directly to HMRC’s account.
In the case of property
So, all sorted then? Well not quite. What if the IHT liability that has arisen is on account of property in the estate (i.e ‘realty’ as opposed to liquid monies, known as ‘personalty’). With the estate assets being made up of mainly or wholly ‘bricks and mortar’, what then is the personal representative to do?
The Revenue do offer an instalment option. They allow you to divide the IHT due against the realty into 10 instalments, payable yearly. For the Grant to issue, they will accept 1/10th of the IHT. Indeed, the instalment option is afforded for an ensuing 10-year period, commencing from six months from the end of the calendar month in which the death occurs. In reality, the personal representatives will pay the 1/10th and then sell the realty, once the Grant issues, and pay the remaining 9/10ths. Interest does, however, of course, accrue on the unpaid IHT.
There may also be the situation though, where all the estate assets are realty, meaning the personal representatives cannot even settle with HMRC the 1/10th, to enable probate to issue. In these circumstances the Revenue has been known to allow the personal representatives to apply to them to issue the Grant ‘on credit’, i.e the estate is impecunious -has no access to monies – so the Revenue may issue the Grant on the understanding that the moment the realty sells, the full IHT liability is paid.
As a belt and braces approach, HMRC can accept an undertaking from the personal representatives’ chosen conveyancing lawyer handling the sale -to pay HMRC direct out of the net proceeds on completion of the said sale.
A solicitor’s undertaking is a very serious promise so would only be given if the personal representatives first, in writing, irrevocably authorise the lawyer to give it.
This is, therefore, something to consider as part of the estate planning process.
Frequently Asked Questions
Who is responsible for paying Inheritance Tax (IHT)?
The personal representatives of the estate (executors if there is a Will, or administrators if there is not) are legally responsible for ensuring any IHT liability is paid.
Why can paying IHT be challenging for some estates?
Difficulties arise when the estate’s assets are tied up in property rather than cash, meaning there may be no readily available funds to settle the tax bill before obtaining probate.
Do banks still require a Grant of Representation before releasing funds?
Not always. Many financial institutions now allow funds to be released directly to HMRC for IHT payments through a direct payment scheme before probate is granted.
What is the direct payment scheme?
It is a mechanism that allows banks and building societies to pay IHT directly from the deceased’s account to HMRC, helping ease cash flow issues during estate administration.
What happens if the estate mainly consists of property?
If the estate lacks liquid funds, personal representatives may need to rely on HMRC’s instalment option or other arrangements until the property can be sold.
Examples
Example A
The “cash-rich” estate
John passes away leaving £200,000 in bank accounts and £300,000 in property. The IHT bill is due, but the executors are able to use the bank’s direct payment scheme to transfer funds straight to HMRC before probate is granted. Once the tax is settled, probate is issued without delay.
Example B
Using a solicitor’s undertaking
Emma’s estate is tied up in property, and the executors arrange for a sale. HMRC agrees to proceed based on a solicitor’s undertaking, where the conveyancing lawyer guarantees that the IHT will be paid directly from the sale proceeds upon completion.
Contact Kew Law's Private Client Team
It can be tricky navigating what is expected of personal representatives when it comes to Inheritance Tax - and even more so if a large part of the estate is tied up in property. It’s always best to work with a legal professional to ensure you’re staying on the right side of the law.
