Catch 22 – The Inheritance Tax “v” Probate conundrum
You have an Inheritance Tax (IHT) bill to pay but you need your bequeathed inheritance to pay it. Before you can receive your Inheritance you need “grant of probate” – you can’t get a full grant of probate until
you’ve paid the IHT bill…
Inheritance Tax of 40% is payable on the value of any assets you are bequeathed that are in excess of the Inheritance Tax threshold.
The Inheritance Tax (IHT) threshold is £325,000 per person, fixed to at least 2021. This means that you can receive £325,000 tax-free and anything over this amount is taxable at 40%.
There are also a few incorporations to this threshold to be aware of. For a couple, when the first spouse dies, their threshold of £325,000 is passed on to the 2nd spouse. They can then leave £650,000 tax-free in their Will. In addition, the Residence Nil-Rate Band (RNRB) means that if your family home is left to a direct descendent ie children or grandchildren then an extra £150,000 from the value of the family home can be left tax free. This will be £300,000 if passed onto the 2nd spouse. This RNRB will increase by another £25,000 per person next year, reaching the ultimate tax-free threshold of £175,000 p.p for bequeathing your residence.
How much Inheritance Tax could I pay
If after all the allowances have been taken off you are left with an estate worth £100,000, for example, you will be liable for £40,000 (40%) of Inheritance Tax.
You may think, you can cover that with your £100,000 inheritance and walk away with £60,000, think again!
Here’s the sting…. you cannot gain full “grant of probate” ie access to your bequeathed estate until the taxman receives his 40%. This is due at the end of the sixth month after someone’s death.
Without probate been granted the assets of the estate cannot be distributed.
What is probate
Probate is the procedure of dealing with a deceased’s estate. This generally means clearing their debts then distributing their assets in accordance with their Will.
In most cases, in order to access a deceased persons financial accounts, the executor of the Will or representative will need to apply to the government’s probate office for a “grant of probate”. This can take anywhere up to 9 months for more complex estates. HMRC may allow this grant to be issued however they will not allow any distributions of Inheritance to beneficiaries until the Inheritance Tax due on the estate has been paid.
How can I pay the IHT bill and receive my Inheritance?
If the bequeathed estate has adequate cash savings to settle the Inheritance Tax bill then the executor can set up a “direct payment scheme” from the bank account to HMRC.
If there is not enough cash to settle the IHT, then the options are limited. The executors can pay it out of their own pockets, recouping it from the estate after probate is granted or take out a bank loan.
If you plan to keep property left to you then it is possible to come to an arrangement with HMRC to pay the tax by instalments over a period of up to 10 years. However, the arrears will accrue interest.
Banks do offer loans to bridge the gap between paying the IHT and benefiting from the estate. However, beware of potentially high-interest rates.
One way to alleviate your family of a large IHT bill is to take out a life insurance policy. These can either be a “term” ie covering a period of time, usually, 5 or 10 years or a “whole of life” policy ie payable upon your death.
If the policy is placed into a “trust” the sum assured will go to the beneficiaries of the trust and will not form part of your estate. Ie it will not be subject to the 40% Inheritance Tax.
This way any IHT liability can be paid straight away without the need for bank loans or selling an asset such as the family home.
If you think your family may be subject to a significant Inheritance Tax bill and you would like to discuss how this can be reduced or financially planned for, get in touch.
Alternatively, if you would like help applying for and dealing with probate, we have a team of experienced probate executives and support staff to help guide you through the maze of red tape.
For more information about Inheritance Tax get in touch with us at Just Wills and Legal Services on 01342 477102 to book a free consultation.
This article is for general information only and does not constitute legal advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.
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