Dear Gary,
I am aged 90, and am concerned about the actual mechanics of paying inheritance tax (IHT) on my death. I know this will be an issue for my children as executors and beneficiaries of my will and not for me, but I want to brief them on the options.
I expect there will be IHT to pay because although I have my late wife’s nil-rate band available, subject to any care fees I may have to pay in the future, my estate will comprise my house worth approximately £650,000 and a share portfolio I manage myself worth £1.4m.
Whenever I can, I reinvest dividends arising on my shares in additional shares (hence the value of the portfolio does go up year on year, even if the stock market does not), and I do have some cash balances of up to £200,000 at any given time.
All this means there will not be enough ready cash to pay the IHT on my death. I am aware my children will need a grant of probate to access my assets on death, but I understand they will have to pay the IHT before they can get the grant.
It seems like a Catch 22. What can I (or rather my children) do about this?
Ray, by email
Dear Ray,
You have identified a practical issue which vexes many executors and beneficiaries, so I hope your children are grateful to you for flagging it now.
First, though, some IHT housekeeping. To reduce the amount of IHT payable on your death I urge you to consider making gifts out of surplus income as per Section 21 of the Inheritance Tax Act 1984.
Such dispositions immediately fall out of the donor’s estate, and the seven years survivorship rule which applies to other gifts does not apply.
Second, it is a pity that because your estate is over £2m the residence nil-rate band will not be available on your death. If you wanted the residence nil-rate band to be available, you would have to reduce the value of your estate to less than £2m.
An option to do this would be some gift some cash or shares. If gifting shares you would have to be wary of capital gains tax owed on the profits.
A curious aspect of the residence nil-rate band rules is that, even though a gift of cash and/or shares by you would be subject to the seven-year survivorship rule, the fact of reducing your assets to under £2m would make the residence nil-rate band available, even though for IHT purposes the gift which reduces the value to under £2m is still relevant for seven years.
To the issue of paying the IHT before the Grant of Probate is extracted. The logic of course is the Government doesn’t want executors and beneficiaries to have full access to assets until the tax payable is paid.
It is therefore a legal requirement to pay the IHT due before applying for a grant, which is very sensible, but it can create a cash flow issue.
Pure cash assets such as your savings can be accessed to pay IHT as HM Revenue and Customs (HMRC) has an arrangement called the Direct Payment Scheme (DPS) with participating banks and building societies for cash deposits to be transferred direct to HMRC’s bank account upon a signed authority by the executors.
To arrange this, the executors must first ask for an IHT reference from HMRC to quote to the asset holder.
Banks not part of DPS may have their own procedures for releasing funds. National Savings Investments and Government Stocks can also be used, as well as cash funds held in some share or investment portfolios.
On the face of it, your available cash of £200,000 will not cover your IHT bill which, on present figures, could be up to £640,000.
One further option is to apply for the IHT due on certain qualifying assets to be paid by instalments. The so-called instalment is set out in the Inheritance Tax Act 1984 Section 227-229.
In your case it would be available for the house, and would allow the IHT attributable to that to be paid over 10 equal instalments over 10 years. Interest is payable, and all the IHT is payable if the asset is sold.
For your estate, I would brief your children on the possibility of getting a grant of probate “on credit”. But to be clear this is a procedure agreed by HMRC only in exceptional circ*mstances.
It can only be requested after death and may not be agreed before. HMRC will expect all available assets to be used up first and the credit element would only be for the balance of the tax due.
Your executors would have to show it has been impossible to raise all the funds needed to pay the tax due and demonstrate that they have made every practical effort to raise the money, including the availability of short-term loans.
In my experience, if you successfully agree a grant on credit, HMRC will want in return an undertaking that once the grant is available, immediate steps will be taken to liquidate assets (in your case sell the house or, more likely, shares) to repay the debt to HMRC.
I am bound to say, HMRC are more likely to agree a grant on credit if your executors are using a professional advisor.
I hope this gives you a plan you can outline to your children. In the meantime, I hope you enjoy life to the full, and spend some of your assets on yourself.
‘Ask A Lawyer’ should not be taken as formal legal advice, but rather as a starting point for readers to undertaketheir own further research.
