With the need for the Government to collect greater taxes, there are a growing number of estates paying tax on death, producing a greater return to the Exchequer annually.
The nil rate bands have been frozen and, as a result, there is a stealth tax, making more estates taxable on death.
Challenges in paying inheritance tax after death
A common concern is how the tax on an estate will be paid on death, as many people arrange their finances to give them income while they are alive but might not have enough cash available to pay taxes when they die.
Inheritance tax is usually paid before Probate is granted, which may put a strain on the executor who often complete the role for no charge, therefore having to find funds to pay the tax.
Using bank funds to cover inheritance tax
The simplest solution is to use any funds remaining in the bank accounts of the deceased. The banks will usually agree to make a payment to HM Revenue & Customs (HMRC) for any inheritance tax up to the funds they hold (upon request and submission of the appropriate forms). If the executor is known to the bank, then sometimes the bank may be willing to lend money to the estate, although this seems to be becoming more challenging and can result in delays.
Alternative solutions
An alternative option is to come to an agreement with the beneficiaries that they fund the tax on death, which is repaid before estate distribution. If circumstances are extremely challenging, the executors can ask HMRC for more time to pay, however they need to show evidence that they have done everything they can to pay as much as possible from the estate.
Where residential properties are involved, it is possible to use the ten annual instalments method to allow a property to be sold, after which the remaining tax would be payable. However, HMRC will charge interest on the outstanding tax balance.
Using life insurance to plan for inheritance tax
Life insurance can help with planning. Where a significant lifetime gift has been made, gift inter vivos policies will provide cover decreasing over seven years as taper relief reduces the liability.
Most insurance providers offer joint whole of life policies, which pay out after both people in a couple have died. These can fall into two camps; those with a guaranteed premium, or those offering different levels of covers with regular reviews. Whole of life policies can often be significantly cheaper than expected. This mainly appears to be because a number of people take these policies out and then cancel them rather than seeing them through to the end of their term. Guaranteed products are fully underwritten at the outset and the premium remains the same throughout the policy. The insurance payout goes to someone not part of the estate, so it is not taxed and can be used to pay the inheritance tax.
Applying to Court for delays
Where the situation is extremely challenging, application can be made to the Court to delay paying the tax until a property is sold, with an undertaking to pay HMRC from the proceeds of that property once sold. This can allow a building to be sold to fund the tax on the estate before Probate is granted.
The seven-year rule in gifting
Funding an estate for tax purposes can be challenging. Where possible, follow the simple seven-year rule: ‘give it away early, survive seven years’, and that part of the Estate should then pass without being taxed.
The next step
If you require any assistance with inheritance tax and probate, please get in contact with Peter Tuffin on p.tuffin@uhy-uk.com, or your usual UHY adviser.
