What If I Can’t Afford to Pay Inheritance Tax?
Inheritance tax (IHT) is a tax on the estate of someone who has died, including all property, possessions and money. If you have inherited a loved one’s estate after their death, you may be concerned about having enough money to pay the tax. Learn more about IHT, how to value an estate and inheritance tax payment options.
How Much is Inheritance Tax?
Only estates valued above £325,000 incur inheritance tax, and only if the estate goes to a beneficiary other than the deceased’s spouse, civil partner or other exempt beneficiary such as a charity. The tax-free threshold increases up to £500,000 when a person leaves their house to their children, grandchildren or other qualifying beneficiaries on death. Speak with a probate professional for help determining the tax-free threshold in your situation.
The default rate of tax in an estate for assets that are not relieved, exempt or within the Nil Rate Band is 40 per cent. So if your estate is worth £550,000 and your Nil Rate Band is £325,000, the tax on £225,000 of the estate would be £90,000.
How Do I Value an Estate?
To determine if inheritance tax is due, you must estimate the estate’s value to see if it exceeds the tax-free threshold. It may be helpful to start with some approximate values to see if the estate is close to being taxable. If it appears inheritance tax is owed or the estate is close to the thresholds, you will need more accurate valuations but the values should usually represent what might be reasonably obtained for the assets on sale.
Identify the deceased’s assets, debts and gifts
Assets include things like:
- Bank accounts
- Savings and pensions
- Property, buildings or land
- Household goods
- Personal items
- Cars and boats
- Stocks and shares
- Foreign assets
- Money owed to them
- Death benefits from life insurance policies or pensions
Debts and liabilities include things like:
- Personal loans
- Money owed on credit cards
- Utility bills
- Bills for goods and services not yet paid
- Funeral expenses
Gifts only count toward the value of the estate if the deceased person gave them away within seven years of their death and the total gift value exceeds £325,000 but, if tax is payable on the estate, many gifts have to be reported. Additionally, tax may be due on ‘gifts’ that someone made more than seven years before their death but continued to benefit from them. Gifts include things like:
- Property or land
- Household and personal goods like furniture, jewellery or antiques
- Listed stocks and shares
- Unlisted shares (held for less than two years before the person’s death)
Estimate the estate’s value
To determine the value of the deceased person’s assets, contact the people or organisations responsible for holding them, such as banks, insurance providers or employers. For household goods and personal items, work out how much you could get for each item if you sold them on the open market.
You must also determine what assets the person owned with someone else. The rules for valuing joint assets depend on whether they were owned as “joint tenants” or “tenants in common.” Seek help from a probate specialist for more information.
To check for gifts the person gave whilst still alive, review bank statements and financial records and talk to family members. Record the value of any gifts from the past seven years and the dates they were given. Executors have been penalised by HMRC for failing to undertake due diligence when investigating gifts.
Do not include the estate’s debts when estimating the gross value. However, you still need to know the total debt when reporting to HM Revenue and Customs (HMRC), so check for debt records from when the person died.
Check if you need to report the value of the estate
You do not need to give full details if no inheritance tax is owed and the estate counts as an “excepted estate.” This applies in most cases. What counts as an excepted estate depends on whether the person died on or after 1 January 2022, or on or before 31 December 2021.
You need to send full details of the estate to HMRC if inheritance tax is due. You have 12 months from the date of the person’s death to report the value, or you could incur a penalty. Download and complete form IHT400 and mail it to the address on the form. If you need help filling in the form, contact a probate professional.
You may still need to send full details to HMRC, even if no IHT is due. Check the GOV.UK website for more information.
Who Pays Inheritance Tax and Where Does it Go?
Funds from the estate or money raised from the sale of assets typically pay inheritance tax to HMRC. Where Inheritance tax is due on gifts given before death then the recipients of those gifts are principally liable to pay the tax. Inheritance tax payments can also come from a whole-of-life insurance policy if the deceased had such a policy and paid the premiums until their death.
If there’s a Will, the executor arranges to pay IHT. Otherwise, the administrator of the estate is responsible for this. Once taxes and debts are paid, the executor or administrator distributes what remains of the estate to the beneficiaries.
When Do I Pay Inheritance Tax?
IHT is due by the last day of the sixth month after the person’s death. So if they pass away in June, you have until 31 December to pay the tax. Remember, you need to get an IHT reference number from HMRC at least three weeks before making a tax payment. You can apply for one online or by post using form IHT422.
If you miss the six-month deadline, HMRC will start charging interest and penalties. In this way, failure to pay on time increases the amount you owe, but a debt to HMRC will not impact your credit score. Thus, you will not reduce your chance of getting a credit card, auto loan or mortgage if you don’t pay inheritance tax on time.
If your inherited estate is likely to incur IHT, it’s wise for the executor to pay some of the tax within the first six months, even if they haven’t finished valuing the estate. This is called “payment on account,” which reduces the interest you might owe if you take longer than six months to pay the tax. If you overestimate the payment on account, you can claim inheritance tax back from the estate, which HMRC will refund once probate is complete.
What If I Don’t Have Enough Money to Pay Inheritance Tax?
Paying inheritance tax can be a struggle for bereaved families, especially if the estate’s value is locked in property and possessions rather than cash. This begs the question—what are the options for paying IHT?
The first option is to pay from your bank account. The account may include your own money or proceeds from selling inherited property, shares or investment dividends. (Note that you may owe Capital Gains Tax on these sales). Where you use funds from outside of the estate to pay for the tax, these may be treated as a loan by you to be repaid by the assets in the estate when they are received but be careful about this, especially if you are not entitled to an inheritance or there could be a claim because it may take a long time to recover your money.
Another option is to pay from accounts owned by the deceased. IHT is most often paid this way using the Direct Payment Scheme (DPS). This involves money being paid directly from the deceased’s bank or building society account to HMRC towards the inheritance tax due.
Thankfully, it’s also possible to pay inheritance tax through less conventional means. Here are some examples:
- Take out an inheritance tax loan: Personal representatives can apply for a loan to pay IHT using the estate as collateral. Before going this route, seek financial advice from a solicitor about the affordability of loan interest rates and the security that a lender may want from you.
- Pay in yearly instalments: You can pay inheritance tax in equal instalments over 10 years if the estate includes assets that take time to sell, such as houses, businesses, and certain shares or securities. Instalments may also be an option for anyone who would face financial hardship from paying in one lump sum but this is subject to HMRC’s discretion. Just be aware that interest accrues on the outstanding tax amount. Once the property or asset sells, any outstanding IHT is due in full.
- Pay with British government stock: Contact Computershare Investor Services, which runs the British government stock scheme, telling them you want to pay IHT with your stock. You’ll also need to send a letter, along with form IHT400 and probate summary IHT421, to HMRC. HMRC will then contact Computershare to transfer the money. This could take up to four weeks, so do not pay this way if you need to get probate quickly.
- Transfer national heritage property to the Crown: In rare cases, paying inheritance tax with national heritage property may be an option. National heritage property includes buildings, land, artwork, books or scientific collections of historic, architectural, scenic or scientific interest. Offers to pay IHT this way are handled on an individual basis.
Get Help Paying Inheritance Tax
At Parfitt Cresswell, we provide expert taxation advice to help minimise IHT charges and keep inherited money in the family. The best way to formulate a wise tax strategy is to seek professional, personalised advice based on your circumstances. Contact us today to request a complimentary initial consultation with one of our probate specialists.
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