Most people are aware of inheritance tax and the added complications it can bring to the process of administering an estate. This type of tax does not need to be paid on all estates, just those that are worth over a certain threshold.
The current threshold for inheritance tax is £325,000. If an estate is worth less than this (including the value of any property or other assets owned by the estate, as well as any investments and savings), then no inheritance tax will be due. If the estate is worth more than £325,000, anything over and above that will be charged at a tax rate of 40%.
However, there are a range of reliefs that can affect how much tax an estate will need to pay, such as if property is left to a child or grandchild. Couples can also combine their tax-free allowance. In practice, this means that couples who leave property to their children or grandchildren could have a combined tax-free allowance of up to £1 million, while couples who don’t do this could have an allowance of up to £650,000.
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When does inheritance tax come due?
This is when things can become a bit of a logistical balancing act. If any inheritance tax is payable on an estate, at least some of it will need to be paid before you can get your hands on the Grant of Probate.
Some estates may not have enough cash immediately available to pay the inheritance tax due at the start. Sometimes, property or other assets will have to be sold in order to meet the bill. The obvious difficulty here is that personal representatives cannot legally sell anything belonging to an estate until a Grant of Probate has been issued to prove they have the right to do so. Delays at both the Probate Office and in the property market can compound this issue.
Personal representatives can look to resolve this issue in a range of ways:
- By paying inheritance tax by instalments. The inheritance tax that needs to be paid on some types of assets can be paid by instalments, such as the tax calculated on a house. These instalments are usually paid over a ten year period.
- By seeking to agree with HM Revenue and Customs to delay some of the payment until property or other assets have been sold by the estate.
- By arranging for the estate to borrow money from personal representatives, beneficiaries or another third party in order to pay the bill on time. These loans could then be claimed back from the estate once the Grant of Probate had been issued and any property had been sold.
Do estates have to pay interest?
The issue with either of the first two options – paying by instalments or paying later – is that both will almost certainly mean that interest starts to build up.
Interest will start to accrue on the balance of any unpaid inheritance tax from six months after the death of the owner of the estate. The rate of the interest estates will be subject to fluctuates alongside market rates. The government publish details of all interest rates since 1988, which is where you will find the most up to date information on the current rate of interest.
At the time of writing this post, the interest rate is set at 7.75%. This has risen thirteen times in less than two years, and is almost three times as much as the January 2022 rate of 2.75%.
The problem with rising interest rates is that the amount that is owed by an estate can quickly start to increase. This is a particular concern during periods where it’s likely that personal representatives will come up against delays when applying for a Grant of Probate or trying to navigate the property market. Although it should be pointed out that in terms of commercial lending, a rate of 7.75% in today’s climate is still very low. In other words, it is better to owe HMRC the money, than pay interest on a bank loan to pay the inheritance tax. Although whether you are in a position to make that choice will depend on the types of assets in the estate, the amount of inheritance tax that is due (and when it becomes due) and the situation as a whole.
Is there anything you can do about this?
The only real way to avoid getting caught out by rising inheritance tax interest payments is to pay any tax that’s due in full within six months of a death. This may be possible with certain estates, especially if the person who has died planned very carefully for the eventuality.
Sometimes, the personal representatives and beneficiaries of the estate may consider meeting the cost of the bill between themselves. We’d always recommend seeking trusted financial advice before making any decisions like this, as you’d need to be certain that any short-term financial sacrifices would be worth the money saved on the final inheritance tax bill.
In many situations, it may not be possible to completely avoid paying any interest on the inheritance tax that’s due, and sometimes you might not want to. For example, it might be better planning overall, to forego the payment of some interest on the inheritance tax due whilst other matters pertaining to the estate are being dealt with or continue to be invested during this time. In these cases, it may be far better to focus instead on trying to ensure you do the best you can to reduce the length of any Probate delays, and therefore the amount of interest that will accrue. [add mention/link to probate delays post/info?]
One way to do this is to ensure you get your application for probate in as soon as possible. You could also consider completing as much of the process of selling property as you can before the grant is issued. Though you won’t be able to exchange contracts on a property sale until you receive the grant, you will be able to put the property on the market, accept an offer and complete all pre-contract checks and searches.
If you’re keen to reduce the additional burden of inheritance tax and interest, a specialist solicitor will be able to advise you on what the options are in your particular situation. Planning ahead before death is also always sensible. A probate solicitor will be able to advise you on this whether you are currently acting as a personal representative or whether you are seeking to make future plans for your own estate.
How Roche Legal can help
We are reassuring experts who can help you with a wide range of legal matters. Please get in touch if you need legal support with:
- Trusts and Estate Planning
- Probate and Estate Administration
- Contested Probate and Will Disputes
- Powers of Attorney
- Court of Protection matters
- Presumption of Death Applications
- Missing Persons Guardianship Applications
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