Payment of inheritance tax when estate funds are locked in

When applying for probate for an estate subject to inheritance tax, the Probate Registry requires that the tax be paid before granting the probate application. This can be difficult as most financial institutions will not pay out money to executors without first seeing the grant, but there are ways to deal with this dilemma.

If the assets are tied up in a business or property, the executors may not have enough cash to pay inheritance tax up front. However, executors can approach a bank that holds property assets and ask the bank to pay HMRC directly. In addition, certain inheritance tax payments may be deferred.

What are the rules for paying inheritance tax?

If inheritance tax is due on an estate you are dealing with, you must pay it within six months of the person’s death. Payments made after the six-month period will be subject to interest and possible fines.
This six-month period represents a maximum period, as inheritance tax must be paid when submitting the inheritance tax account to HMRC. Without first paying the Inheritance Tax, HMRC will not allow the Inheritance Registry to release a grant of probate, and without the grant of probate you cannot continue administration of the estate.

As a grant of probate is required to gain access to most estate assets, it is common for executors to approach one or more of the banks holding funds and ask the bank to pay the estate tax due. directly to HMRC. Once the tax debt has been settled, HMRC will confirm this to the Probate Registry and you will be free to obtain the grant of probate.

If the funds held in bank accounts and other liquid investments are insufficient to cover all of the tax payable, you may find yourself in a situation where you cannot pay the tax until probate is obtained and the assets can be sold, while being unable to obtain the grant of probate until the tax debt is paid. In these circumstances, speak to our attorneys to determine if deferred payments might be an option for you.
Pay inheritance tax in installments

HMRC allows inheritance tax to be paid in instalments over a period of ten years on certain immovable assets which are:

  • land and real estate;
  • company assets;
  • shares that gave the deceased complete control of a company; and
  • certain unlisted minority interests (according to specific criteria).

Inheritance tax due on either of these types of property can be split into 10 equal installments. However, the first of the 10 installments is payable before the probate is issued.
When opting for installment payment, it is important to note that interest may accrue. If the installments relate to goodwill or shares, interest only accrues on each installment if it is paid late. In the case of land or building, installments bear interest from six months after the date of death until death duties are paid in full, even if all installments are paid on time.

For this reason, many executors opt for the deferral option in order to obtain the grant of probate, but then pay any inheritance tax due as soon as the assets are sold to minimize interest. When selling goods themselves subject to inheritance tax by installments, all of the inheritance tax due on this property must be paid at the point of sale. The minimization of interest should also be a key factor when executors consider their obligations to beneficiaries, as it is of course in the interest of beneficiaries to pay as little interest as possible on inheritance tax.

What if there are not enough funds to pay the first installment of inheritance tax?

If you are the executor of an estate where all or most of the assets are land or real estate, you may find yourself with no funds available to pay estate taxes owed before probate is obtained. You, or the dependents, may temporarily have to pay inheritance tax personally, through an estate loan. Alternatively, you can apply for a bank loan to cover the tax due.
Either of these options will require you to ensure that the terms of the agreement are clear and fair, and you should seek advice as to whether these options are appropriate for your personal circumstances.
Where executors and beneficiaries are unable to cover the cost of inheritance tax and a bank loan is not an option, HMRC may agree to provide credit. HMRC will require a professional undertaking that inheritance tax will be paid once the assets are sold and may even require confirmation that a buyer has already been found. As such, this option will generally only be available if you have a legal representative acting on your behalf.

How can we help?

Paying inheritance tax can be difficult to manage, as it is often a circular issue between paying the tax and releasing the granting of probate. However, it is not an insurmountable problem and can be solved with the right professional advice. Getting advice as early as possible can avoid unnecessary stress and interest.

Our lawyers can advise you on paying inheritance tax and what options are likely to be best suited to your needs.

For further information please contact Joshua Williams on 01227 274241.

Note: This article is provided for informational purposes only and does not constitute legal or professional advice.

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