Inheritance Tax planning is increasingly common these days, with thousands of people up and down the country carefully considering ways to reduce the eventual tax bill through measures such as trusts and gifting.
While this is eminently sensible, it’s also increasingly worthwhile thinking about exactly how your loved ones will pay any Inheritance Tax bill that comes up, as the current requirements could push them into taking out an expensive loan.
Read: how to cut your Inheritance Tax bill
Gaining access to an estate
The current probate system is a little complicated.
When someone dies, their estate is essentially frozen, with an executor – named in the will – tasked with dividing the estate up according to the deceased person’s wishes.
There may also be inheritance tax to pay. Depending on the assets involved, this may be payable in instalments, but at least the first chunk of tax will need to be paid within six months of the death.
In order to access the deceased person’s estate, the executor needs to get a grant of probate. Probate fees have been a controversial topic of late, with the Government revamping what estates have to pay.
However, this is where the problems can begin, as the first instalment of Inheritance Tax needs to be paid before probate will be granted.
In other words, your loved ones will need to find the money to pay your tax bill, before they can get access to your estate.
The rising numbers caught out by inheritance tax
Inheritance Tax used to solely be a concern of the very well off, but with rocketing property prices far more people now need to cough up some money for the taxman after they die.
This is obviously good news for HMRC – in the first half of the 2018-19 tax year, the taxman has pocketed £2.8 billion, while the Office for Budget Responsibility (OBR) reckons that for the full tax year receipts will finish at £5.4 billion, a new record.
But it means far more families need to think about what bill they may face, and how to pay it. According to the OBR in 2017-18 around 22,800 estates were liable to pay the tax.
So what can you do?
The first option will be to look at the cash in savings held by the deceased. If they have enough money to cover the bill, then you can ask the bank or saving provider to release the cash.
You can also review their investments. Again, you can approach the providers here to ask them to allow you to use the money held to go towards paying that Inheritance Tax bill.
Frustratingly, different firms will have different requirements when it comes to releasing this money. So while this will be an option for some, for others that money will remain just out of reach.
The next option will be to dip into your own savings, and then top them back up afterwards with money from the estate. But depending on the size of the tax bill - or your own financial position - that may not be an option.
The final alternative is to go to a bank to try to arrange a loan in order to cover the inheritance tax bill, which you can then pay off once probate has been granted.
Chances are this isn’t going to be a small amount, so a traditional personal loan won’t be appropriate.
You may need to look to a bridging loan – these are short-term loans commonly used by property investors, but be warned they can be incredibly expensive.
Not only will the rate be significant, but there will also be arrangement fees to consider too.
This is daft
I understand why the system is set up this way. The taxman, understandably, wants its money before the beneficiaries of the estate have the chance to access the cash and spend it, or even disappear.
But pushing people into a situation where they need to take out a loan in order to cover what is essentially someone else’s tax bill is utterly ridiculous.
Surely there is a better way of handling this, where the taxman still gets its money swiftly, but families who are already grieving are faced with a tax bill they have no way of paying without turning to credit?
In the meantime, if you are likely to leave an estate which is subject to inheritance tax, it pays to ensure that there is money in cash which the executor will be able to access in order to cover the bill.
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