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.