Unfortunately, the answer is ‘yes’ you do pay inheritance tax before probate. If there is an Inheritance Tax (IHT) liability on the estate, then at least some of the tax must be paid before probate is granted.
This is unfortunate because it can create issues for the administration of the estate. For instance, if there is a property involved, it can’t be sold without probate and probate can’t be granted without the paying IHT. Ideally, the executor should pay some inheritance tax at least within six months of death, even if the valuation of the estate is ongoing. This is what’s known as payment on account. It should be clear that if the administrator or executor does pay IHT from their own funds, it can then be claimed back from the estate.
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What is Inheritance Tax?
Inheritance Tax is a tax on the estate of someone who has died. The inheritance tax calculation is based on the value of all assets including any property, possessions, investments/shares, any insurance policy pay-outs, funds held in financial institutions and cash. The standard Inheritance Tax rate is 40%, but this is only charged on the part of the estate that’s above the tax-free threshold – currently £325,000.
There is no tax payable if you leave everything above the threshold to your spouse, civil partner, or exempt beneficiary, such as a charity. Passing on your home to children or grandchildren means the threshold increases to £500,000. As a result of these rules, only a minority of estates in the UK pay Inheritance Tax.
When it comes to valuing an estate, you’ll need to value all assets, before deducting debts and liabilities. You’ll also need to keep records of how valuations were obtained as HMRC can ask to see records up to 20 years after Inheritance Tax is paid.
Inheritance Tax must be paid by the end of the sixth month after the person’s death, or interest will be charged by HMRC. On certain assets, such as property, the tax can be paid in instalments over a ten year period, but, again, interest will be charged.
Who pays Inheritance Tax?
If there’s a will, normally, it is the executor of the will who will handle the arrangements for paying inheritance tax. In the absence of a will, it will be the administrator of the estate. Inheritance Tax can be paid from funds within the estate or from the sale of assets. In practice, most Inheritance Tax is paid through the Direct Payment Scheme (DPS). What this means is that if the deceased had money in a bank or building society, the person handling the estate can ask for the inheritance tax to paid directly from that source.
Inheritance tax should be calculated using HRMC forms, IHT400 (valuation form) and IHT421 (probate summary form). The completed forms must be returned to HMRC within 12 months of the individual’s death. Twenty days after application, you can then apply for probate.
In some cases, the deceased will have made arrangements to pay inheritance tax in advance, possibly through a life insurance policy. Bear in mind that, a pay out from a life insurance policy may be subject to inheritance tax., unless the policy has been written ‘in Trust’. If this is the case, the policy provider pays out to the trust and this can then be used to pay for all or part of the inheritance tax bill, avoiding a lengthy probate process.
When the debts and tax are paid, the executor or administrator can distribute what’s left in the estate.
Financing Inheritance Tax
Since inheritance tax. needs to be at least partly paid before probate is granted, this can be a problem for some estate administrators, or Legal Personal Representatives (LPR). Executors and administrators are not personally liable for inheritance tax. However, if the money is not readily available from the estate, for example it’s tied up in property or investments, inheritance tax still needs to be paid before probate is issued. HMRC expect LPRs to source the money either via their own assets or an inheritance tax loan to settle an inheritance tax liability before issuing probate.
Inheritance Tax Funding options include:
Direct Payment Scheme – As referenced earlier, at the request of the LPR, banks and building societies can make payment directly to HMRC from the accounts of the deceased. This normally requires production of a death certificate and an IHT423 form.
Installments – If the executor is unable to make payments under the Direct Payment Scheme, then they can offer to make installments (subject to interest), while awaiting probate to be granted.
An Executor’s Loan – The final option is to borrow the money in the form of a bridging load, allowing IHT to be paid and probate to be obtained, so that the estate can be released to the beneficiaries. In this case, you’ll need to contact a bank, or other loan provider, and make a formal application at standard loan rates. The estate’s assets will normally be used as collateral for the loan.
The best way to deal with issues due to probate and Inheritance Tax is to get professional advice tailored to your specific needs. Start by booking your free consultation with a Probate Network solicitor who can help with the inheritance tax calculations Book at time that works for you via our online booking system.
