Paying Inheritance Tax (IHT) before probate is granted can feel like a catch-22. The IHT must be paid before probate is granted, but you need probate to access the estate funds. Fortunately, HMRC provides a few ways to help executors navigate this dilemma.
Calculate the Estate’s IHT liability
Firstly, executors need to establish the value of the estate and calculate how much IHT is due. This is usually done using form IHT400, which details the assets, debts and gifts made by the deceased.
Before submitting the IHT forms, executors must apply to HMRC for an IHT reference number. This can be requested online or by posting form IHT422.
The reference number can take up to three weeks to arrive.
Pay Inheritance Tax using the Direct Payment Scheme (DPS)
Once IHT has been calculated, the simplest way to pay is using the Direct Payment Scheme (DPS).
Executors can use form IHT423 to ask the deceased’s bank or building society to transfer funds directly to HMRC. Many banks are part of this scheme, and it avoids the need to look elsewhere for funding. A separate IHT423 form will be needed for each bank account.
Alternative ways to fund the IHT payment
If there aren’t enough available funds in the bank, other options include:
- Secured bank loans: Executors can seek to borrow from a bank secured on the assets of the Estate. This is attractive as the interest on any loan can be offset against income received.
- Loans from beneficiaries: It may be attractive for beneficiaries to lend from their own resources and later reclaim it from the estate.
- Pay in annual instalments: HMRC allows the IHT to be paid in annual instalments over ten years. However, the first instalment still needs to be paid before probate is granted and interest still applies. This facility exists for the IHT liability arising on land of any description and also unquoted shares and some interests in a business.
Apply for probate
Once HMRC receives the payment and accepts your IHT forms, the executors can apply for the grant of probate. This legal document gives the executors authority to access the estate’s assets, settle debts and distribute funds to beneficiaries in accordance with the will.
Important deadlines and interest charges
IHT is payable six months after the date of death.
Interest is payable on any amounts paid late and the interest rate is currently 8.25% per annum - making delays an expensive option! Early preparation and timely communication with HMRC and banks can help avoid unnecessary interest charges.
The next step
Understanding how to pay Inheritance Tax before probate can be complex, especially when navigating deadlines, forms, and funding options. If you need tailored advice or support with your responsibilities as an executor, our dedicated executors and probate team is here to help.
Get in touch with Jo Goulding or one of our probate specialists today for clear guidance and peace of mind throughout the process.
