Payment of Inheritance Tax
Discussion
Can someone explain to me how inheritance tax is actually paid to the Revenue? My (uninformed) assumption was that the probate process would value the estate, and then the tax due would be deducted before any bequests are paid out (excluding things like funeral costs which can be taken out of the estate before probate is completed).
Therefore, if someone died with an estate of, say, £500k, with a £325k threshold, there would be 40% tax due on £175k which is £40k. Remaining estate to the beneficiary/ies of £430k.
My FIL, who was a partner in a law firm until he retired some 15 years ago, has it that the IHT has to be paid direct to the revenue, in advance, before any estate is released, and that in the event the beneficiary doesn’t have the £70k (in my example) to cough up in advance, they have to borrow it, and that the banks are well-versed in this practice and charge interest accordingly.
I can’t possibly see how that can be correct. What if I left my entire estate to the down-and-out I pass on the way to work every day, who’s never held a bank account in their life and has 23p to their name? Do they have to scrub up for a meeting with a bank manager, open an account, and immediately takeout a large loan? Or another example, what if I decide to equally split my estate between 20 people? Do they have to stump up £3.5k each? Or does the executor have to find the £70k so that he/she can execute the will?
Seems completely double-dutch to me, but I’ve been wrong before. Perhaps someone can advise?
Therefore, if someone died with an estate of, say, £500k, with a £325k threshold, there would be 40% tax due on £175k which is £40k. Remaining estate to the beneficiary/ies of £430k.
My FIL, who was a partner in a law firm until he retired some 15 years ago, has it that the IHT has to be paid direct to the revenue, in advance, before any estate is released, and that in the event the beneficiary doesn’t have the £70k (in my example) to cough up in advance, they have to borrow it, and that the banks are well-versed in this practice and charge interest accordingly.
I can’t possibly see how that can be correct. What if I left my entire estate to the down-and-out I pass on the way to work every day, who’s never held a bank account in their life and has 23p to their name? Do they have to scrub up for a meeting with a bank manager, open an account, and immediately takeout a large loan? Or another example, what if I decide to equally split my estate between 20 people? Do they have to stump up £3.5k each? Or does the executor have to find the £70k so that he/she can execute the will?
Seems completely double-dutch to me, but I’ve been wrong before. Perhaps someone can advise?
I've just been through planning her legacy with my Mum. Your FIL is correct. You have to cough up in advance of receiving the estate. Banks do loan against upcoming inheritances if you provide evidence. The Revenue will not wait for you to sell any house you inherit for example. This is why probate houses are often sold at auction as quickly as possible in order to pay back the loans taken out to pay inheritance tax.
ElectricSoup said:
I've just been through planning her legacy with my Mum. Your FIL is correct. You have to cough up in advance of receiving the estate. Banks do loan against upcoming inheritances if you provide evidence. The Revenue will not wait for you to sell any house you inherit for example. This is why probate houses are often sold at auction as quickly as possible in order to pay back the loans taken out to pay inheritance tax.
Wow, that seems really arse about face. So, whilst I mentioned the beneficiaries above, I guess in practice it's effectively the executor(s) who have to arrange payment up front? And they may not even be beneficiaries.I suppose it can't be effectively "deducted at source" from the estate due, as you say, to things like house sales. Just seems that that could be a really difficult position for some people to be put in, you could have an impecunious son/daughter and leave them your £500k house where they would then have to find a chunk of change before they could get on and sell it. I'm quite surprised.
The short of it is that IHT needs to be paid wihin six months of death, you do not need to have completed probate, but that then means you cannot use assets of the estate to pay the IHT.
If you do not have a final valuation before the six months then any difference between the amount finally owed and the amount paid will attract interest, the interest if you underpay being higher than that you get back if you overpay, it is normally better to overpay a little if you can. If a property is sold for less than the estimate you can claim tax back as well as interest on any owed tax amount.
I'm not certain so please check, however I don't think you can put any of the executor's costs, including intrest on a loan, against the estate, i.e. it does not reduce the tax bill.
If you do not have a final valuation before the six months then any difference between the amount finally owed and the amount paid will attract interest, the interest if you underpay being higher than that you get back if you overpay, it is normally better to overpay a little if you can. If a property is sold for less than the estimate you can claim tax back as well as interest on any owed tax amount.
I'm not certain so please check, however I don't think you can put any of the executor's costs, including intrest on a loan, against the estate, i.e. it does not reduce the tax bill.
It makes sense to have enough cash in the bank to pay the tax you are liable to pay when you die. The beneficiaries to your estate are not forced to liquidate your assets in order to pay your tax bill.
This guide has some useful examples https://www.saga.co.uk/magazine/money/personal-fin...
It's interesting to read that it's possible to pass away with assets of £1m and to have no inheritance tax due. See 'Maximum nil-rate band for second spouse to die' -> 2020/2021
This guide has some useful examples https://www.saga.co.uk/magazine/money/personal-fin...
It's interesting to read that it's possible to pass away with assets of £1m and to have no inheritance tax due. See 'Maximum nil-rate band for second spouse to die' -> 2020/2021
Edited by WhiskyDisco on Monday 16th July 15:40
I've been the executor for two estates in the last five years (from memory):
Appoint probate solicitors
Sell all assets, assign all live bank accounts etc to solicitors client acct
Solicitor come up with the totals of the estate (minus costs etc)
Get the final figure owed to HMRC and AGREED by HMRC, all assets etc over £325k are paid at 40%
Pay HMRC the agreed figure
Only then, release and distribution of remaining funds to beneficiaries.
OP, it seems a very strange way of doing things as you describe. Pay the IHT before!!! Never heard of paying the IHT before; I've only ever heard of paying the IHT out of the estate and then once done, distributing remaining monies to beneficiaries of the Will.
Maybe we're missing a trick and there is a good reason your FIL did it the way he did!
Appoint probate solicitors
Sell all assets, assign all live bank accounts etc to solicitors client acct
Solicitor come up with the totals of the estate (minus costs etc)
Get the final figure owed to HMRC and AGREED by HMRC, all assets etc over £325k are paid at 40%
Pay HMRC the agreed figure
Only then, release and distribution of remaining funds to beneficiaries.
OP, it seems a very strange way of doing things as you describe. Pay the IHT before!!! Never heard of paying the IHT before; I've only ever heard of paying the IHT out of the estate and then once done, distributing remaining monies to beneficiaries of the Will.
Maybe we're missing a trick and there is a good reason your FIL did it the way he did!
Edited by 7795 on Monday 16th July 17:41
CAPP0 said:
My FIL, who was a partner in a law firm until he retired some 15 years ago, has it that the IHT has to be paid direct to the revenue, in advance, before any estate is released, and that in the event the beneficiary doesn’t have the £70k (in my example) to cough up in advance, they have to borrow it, and that the banks are well-versed in this practice and charge interest accordingly.
I can’t possibly see how that can be correct.
I suspect that your FiL is thinking of a case where the entire estate is in assets - a house, say - and there simply isn't £70k in cash within the estate to pay the IHT.I can’t possibly see how that can be correct.
So the executors have a choice. They can't simply distribute the asset to the beneficiary, because IHT can't be paid from the estate. So either the house has to be sold by the executor, the IHT paid from the receipts, then the rest of the money paid to the beneficiary...
...or the beneficiary pays £70k into the estate, the IHT gets paid, then the asset is simply signed over.
Let's say the house is worth £500k. The estate is worth £430k after IHT is paid out of it. The beneficiary either gets £430k cash or a £500k asset and gives £70k "change"...
It may not be the same in every case, and the rules may have changed since, but when my wife's Aunt died in 2001 with an estate valued at nearly £4 million the inheritance tax of £1.5 million had to be paid before anything else could happen. The assets were all in shares and property so a bank loan had to be taken out and then the property could be sold and the shares cashed in.
One thing I learned from the experience was never to have a solicitor as an executor. When his bill came in it was for over £50,000. Nice work if you can get it !
One thing I learned from the experience was never to have a solicitor as an executor. When his bill came in it was for over £50,000. Nice work if you can get it !
CAPP0 said:
So I'm now more confused - Electric Soup says stump up up front, 7795 says deduct at source from the estate. Which is where I started - so which is it?
They are not mutually exclusive - it is upfront and can be sourced from the estate. You have to submit an IHT account to HMRC before you can get probate and there is a time limit on when the payment has to be made (6 months I think - you'll need to check). If there are sufficient funds in bank accounts etc then the estate administrator can use those to make the IHT payment (most banks have an arrangement whereby estate funds can be released to HMRC before probate for this) otherwise the estate administrator has to arrange to borrow the amount and then repay the loan when non-cash assets (for which probate is required) are liquidated.
Edited by siremoon on Monday 16th July 21:49
CAPP0 said:
So I'm now more confused - Electric Soup says stump up up front, 7795 says deduct at source from the estate. Which is where I started - so which is it?
In both my cases where I was the executor there was a lump of cash and a house or two and all the houses sold within 3 months.All monies from the estate (cash, cars sold, houses sold, etc etc) were held in the solicitor's client account until HMRC looked at all the figures, were happy with them. IHT was then paid and once received from the estate the beneficiaries we sent the % as per the deceased Will.
desolate said:
chutley said:
What happens when your surviving partner lives in the house?
Depends if they are married or not.edit: plus there is an increased limit for the home.
The same exemption is available to a registered civil partner.
This explains how to use the nil rate band to best advantage.
It also shows the additional nil rate band on a residence passed on to a direct descendent.
https://www.gov.uk/government/publications/inherit...
IHT is indeed paid from the estate in advance of distributing the assets. The executors don’t have probate until the IHT is paid so they can’t distribute assets. With the exception of IHT on property, it has to be paid by the end of the sixth month after death.
How the executors do that is up to them, and is their problem not the beneficiaries’. Some bank accounts or investments will pay IHT direct to HMRC prior to probate if you ask them to. The executors could ask the beneficiaries for a loan; I see no reason why not.
IHT on property does not have to be paid in advance if the property hasn’t sold - which it won’t have done because you haven’t yet got probate. You can choose to pay the property component in instalments over 10 years (with interest), but you must cough up the remaining balance as soon as the property sells.
All payments can be made by BACS transfer, carefully quoting your IHT reference number as the reference on the payment.
When I did probate for my mum and dad last year, there was a life bond that paid out the lion’s share direct to HMRC. I then paid the remainder out of my personal funds and took the money back when it became possible. I paid off the property IHT as soon as possible without waiting for the houses to sell, to avoid interest.
How the executors do that is up to them, and is their problem not the beneficiaries’. Some bank accounts or investments will pay IHT direct to HMRC prior to probate if you ask them to. The executors could ask the beneficiaries for a loan; I see no reason why not.
IHT on property does not have to be paid in advance if the property hasn’t sold - which it won’t have done because you haven’t yet got probate. You can choose to pay the property component in instalments over 10 years (with interest), but you must cough up the remaining balance as soon as the property sells.
All payments can be made by BACS transfer, carefully quoting your IHT reference number as the reference on the payment.
When I did probate for my mum and dad last year, there was a life bond that paid out the lion’s share direct to HMRC. I then paid the remainder out of my personal funds and took the money back when it became possible. I paid off the property IHT as soon as possible without waiting for the houses to sell, to avoid interest.
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