When should I start thinking about Inheritance Tax?
When reviewing your financial plans and when making a Will, it is important to consider your Inheritance Tax position. This will help you to determine if your estate could be liable to HMRC for payment of Inheritance Tax after you die. Further, by putting plans in place during your lifetime (such as creating a Will), you can ensure that you make the best use of the Inheritance Tax allowances and exemptions that are available to you.
In simple terms, Inheritance Tax is payable at a rate of 40% on the amount exceeding the inheritance tax free allowances known as the nil rate band and if applicable, the residence nil rate band (we have prepared a guide to Inheritance Tax which contains further information about the Inheritance Tax allowances and this can be accessed here.
You should keep your Inheritance Tax position under review regularly especially if the value of your assets increase.
Who will calculate and pay any inheritance tax due after I die?
Your executors (or in the absence of a Will, your administrators) are responsible for calculating any Inheritance Tax due. The starting point is for them to calculate the value of your estate by determining the value of your assets at the date you die and any gifts made in the previous 7 years. Sometimes gifts made in the previous 14 years need to be taken into account but this is only in very specific circumstances. They will then need to deduct any liabilities such as outstanding mortgages and credit cards.
If Inheritance Tax is due, your executors must complete an Inheritance Tax return called form IHT400 (in some cases this may also need to be completed where no IHT is due) and the relevant schedules and send this to HMRC within 12 months of the date of death.
How long do my executors have to pay Inheritance Tax?
Your executors have until the end of the sixth month after you have died to pay HMRC the Inheritance Tax due. For example, if someone died in January 2023, the deadline for paying Inheritance Tax would be 31 July 2023. This usually means that at least some of the Inheritance Tax must be paid before a Grant of Probate can be issued (a document which gives your executors the authority to deal with your assets). This can cause issues because a Grant of Probate is often required before assets can be sold to settle the Inheritance Tax due, leaving the executors in a difficult position.
Where funds are available to pay Inheritance Tax, some banks will be prepared (without a Grant of Probate) to pay the amount due direct to HMRC from the deceased’s bank account. Each bank has their own requirements, however they will all require as a minimum a death certificate and the relevant Inheritance Tax form.
It’s important to note that your executors will need to request an Inheritance Tax reference number from HMRC at least three weeks before making a payment.
What happens if my executors fail to pay the Inheritance Tax due by the deadline?
After the six month deadline, HMRC will start to charge interest on any unpaid Inheritance Tax. The rate of interest has changed six times since the beginning of 2023 and currently stands at 7.75%. For example, if £100,000 of Inheritance Tax is due and remains unpaid for one month past the deadline, the amount of interest due will be approximately £656.42.
In addition, failing to submit the Inheritance Tax return (IHT400) on time may result in a financial penalty and further ongoing penalties depending on how long the return remains outstanding.
What can my executors do if they can’t pay the Inheritance Tax due from my available assets by the deadline?
Your executors could choose to:
- Make a payment on account to HMRC. This is usually done where the amount of Inheritance Tax due isn’t yet known. If your executors pay too much Inheritance Tax, HMRC will refund the estate with the addition of interest at the current rate of 4.25% (notably less than the interest rate that applies to late payments).
- Pay the Inheritance Tax in yearly instalments over 10 years on certain estate assets that can take time to sell such as a house. In this case, interest will accrue on instalments from the end of six months following the date of death until the Inheritance Tax account is settled in full. The first instalment must be paid before the Grant of Probate can be issued.
- Make payment of Inheritance Tax (e.g. for the first instalment or for the full amount) from their own bank account and the amount they have paid can be reclaimed from your estate once the Grant of Probate has been issued and they can collect in the assets.
- Take out a loan to cover the Inheritance Tax due. This will enable the executors to pay the Inheritance Tax due, obtain the Grant of Probate and then sell the estate assets to pay off the loan. Interest accrues on the loan whilst it remains outstanding and is usually paid at the same time as the loan.
The above options are not exhaustive and may not be suitable or available for all executors. It is therefore important that advice is sought at the earliest opportunity to determine the most appropriate solution to reduce the amount of interest payable by the estate whilst its assets are in the process of being sold.
How we can help
Inheritance Tax can be difficult for an executor to navigate when applying for a Grant of Probate especially during what is often a stressful and upsetting time. Further, completing the Inheritance Tax return (IHT400) can also be complex and full investigation of a deceased person’s assets and full disclosure to HMRC is essential to getting it right and avoiding the risk of penalties.
Our Solicitors, Paul Clark and Sarah Bushell can provide executors with specialist advice on Inheritance Tax and the options available to them to preserve estate assets for the beneficiaries – just one of the many duties of executors.
Click here to book a free initial meeting with one of our Probate Solicitors. Alternatively call our Congleton office on 01260 769 639.
This article is for general information only and does not constitute legal advice.
