Paying inheritance tax when estate funds are tied up

When applying for probate in regard to an estate which is subject to inheritance tax, the Probate Registry requires tax to be paid before the grant of probate application. This can prove difficult as some financial institutions will not pay out sums to executors without first seeing the grant, but there are ways to deal with this dilemma.

‘If assets are tied up in a business or property, then executors may not be holding sufficient liquid funds to pay the inheritance tax up front,’ says Jessica Pye, an Associate Chartered Legal Executive in the Wills, Probate and Trusts team with MacDonald Oates LLP in Midhurst. ‘However, executors can apply to a bank which is holding estate assets and request the bank to pay HMRC directly. In addition, certain inheritance tax payments can be deferred.’

What are the rules for paying inheritance tax?

If inheritance tax falls due on an estate you are dealing with, you must pay this within six months of the person’s death. Payments made after the six month deadline will be subject to interest and possible fines.

This six month period represents a maximum time limit, as inheritance tax must be paid upon submitting the inheritance tax account to HMRC. Without first paying the inheritance tax liability, HMRC will not allow the Probate Registry to release a grant of probate, and without the grant of probate you cannot continue the administration of the estate.

As a grant of probate is needed in order to access most estate assets, it is common for executors to apply to one or more of the banks holding funds and to request the bank pays the inheritance tax due directly to HMRC. Once the tax liability has been settled HMRC will confirm this to the Probate Registry, and you will be free to obtain the grant of probate.

If funds held in bank accounts and other liquid investments are insufficient to cover the tax liability in full, you may find yourself in a position where you are unable to clear the tax until a grant of probate is obtained and assets can be sold, whilst also being unable to obtain the grant of probate, until the tax liability is paid. In these circumstances speak to our solicitors to discuss whether deferred payments could be an option for you.

Paying inheritance tax by instalments

HMRC do allow inheritance tax to be paid by instalments over a ten year period on certain estate assets which are:

• land and real property;
• business assets;
• shares which gave the deceased complete control of a company; and
• certain unquoted minority shareholdings (dependent upon specific criteria).

Inheritance tax falling due in respect of any of these types of assets can be split into 10 equal instalments. However, the first of the 10 instalments is payable prior to the grant of probate being issued.

When opting for payment by instalments, it is important to note that interest may accrue. If instalments relate to business assets or shares, interest only arises on each instalment if it is paid late. With land or real property, the instalments carry interest from six months following the date of death until the full inheritance tax is settled, even if all instalments are paid on time.

Because of this, many executors opt for the instalment option in order to obtain the grant of probate but then pay all of the inheritance tax due as soon as assets are sold to minimise interest. When assets are sold which themselves are subject to inheritance tax by instalments, the full inheritance tax due on that asset must be paid at the point of sale. The minimisation of interest should also be a key factor when executors are considering their duties to the beneficiaries, as it is of course in the beneficiaries’ best interest to pay as little interest on inheritance tax as possible.

What can be done if funds are not sufficient to pay the first instalment of inheritance tax?

If you are the executor of an estate where all, or most of, the assets are land or real property, you may find yourself without available funds to pay any of the inheritance tax due prior to obtaining the grant of probate. You, or the beneficiaries, may have to temporarily meet the inheritance tax liability personally, by way of a loan to the estate. Alternatively, you can apply for a bank loan to cover the tax due.

Either of these options will require you to ensure that the terms of the agreement are clear and fair, and you should seek advice as to the suitability of these options in your individual circumstances.

Where executors and beneficiaries are unable to cover the cost of inheritance tax and a bank loan is not an option, HMRC may in rare occasions agree to the issue of a grant of credit. HMRC will require a professional undertaking that inheritance tax will be paid once assets are sold and may even require confirmation that a purchaser has already been found. As such, this option will usually only be available when you have a legal representative acting on your behalf.

How can we help?

Payment of inheritance tax can be tricky to navigate, as is it often a circular issue between payment of tax and release of the grant of probate. However, it is not an insurmountable issue and can be resolved with the correct professional advice. Obtaining advice as early as possible can prevent stress and unnecessary interest.

Our solicitors can advise you on the payment of inheritance tax and which options are likely to be the most suitable for your needs.

For further information, please contact Jessica Pye in the Wills, Probate and Trusts team on 01730 816711 or email .  MacDonald Oates LLP has offices in Midhurst, West Sussex and Petersfield, Hampshire.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.