Borrowing to repay Inheritance Tax
Peter McGahan
Monday 23rd September, 2024.
IN as polite a way as I can put it, inheritance tax is as popular as the most unpopular thing you can think of!
Inheritance tax is set at 40 per cent of the estate after allowances, with the nil rate band of £325,000 being the biggest one. You also have a residence nil rate band for your home, which can take the total to £500,000 per person, so tax wouldn’t be paid below that figure.
When inheritance tax is due, it must be paid within six months of death. After that, interest is charged. If that sounds draconian, and not overly ‘nice’, given that you are dealing with many emotionally charged issues after a death, you would be right. But it’s how it is.
The tax must be paid before the estate is released from probate, i.e. you receive a grant of probate.
You can use assets like cash which are within the estate to repay the inheritance tax, so that gives some flexibility. However, that doesn’t always suit as some assets are not always easy to access, like property or land. If an investment portfolio has fallen in price, due to stock market volatility, selling at the bottom of the market isn’t overly palatable.
Selling property, or land, in a downturn, is equally difficult and you really don’t want to be in a fire-sale environment i.e. having to sell quickly. Buyers will know the power sits with them so the price will match it.
Because of this rigidity, the Revenue allow for payments on certain assets like land and property to be repaid in instalments over 10 years. Unlisted shares in a company and money in a trust are two other assets which qualify.
Can you imagine trying to sell shares in a business where every buyer knows you must sell them?
The first instalment of inheritance tax is due at the same time as the rest of the inheritance tax, by the end of the sixth month following the date of death. However, instead of paying the entire tax bill, you can pay just one-tenth of the tax due on the qualifying asset.
Each subsequent annual instalment is due on the anniversary of the first payment for the next nine years.
Interest begins to accrue after the sixth month following the death.
If the asset (like property or shares) is sold during the instalment period, the outstanding inheritance tax on that asset becomes due immediately. For example, if you sell the family home after three years, the remaining tax instalments would have to be paid at that point.
For other parts of the estate (like cash in bank accounts, insurance policies, or listed shares), the tax generally must be paid in full by the six-month deadline. Executors are typically able to access funds in the deceased's bank accounts to pay the inheritance tax before the full estate is settled. This can help to avoid any delays in payment.
If inheritance tax is not paid within the six-month deadline, and the estate does not qualify for the instalment option, the executors will need to pay interest on the outstanding amount. The rate is currently 7.5 per cent per year.
Remember, you must make the first payment in the instalment plan before you get grant of probate.
There are a few lenders out there who will lend you the money on bridging finance to pay the inheritance tax. As you don’t own the asset yet (it’s still in probate and in the name of the deceased) you can’t secure a loan against it, but you can borrow as an unsecured loan or also as a secured loan against your own home, the latter being the cheaper option by a stretch.
You borrow the money, pay off the inheritance tax, receive grant of probate and then sell the assets to repay the loan. If that was the option, you should prepare all paperwork quickly for probate then borrow for the shortest time as the rates can be beefy based on your situation, i.e. over two per cent per month.
There are many options cheaper than that of course but it depends on your situation.
If you have a query in relation to borrowing to repay inheritance tax, please call 01872 222422 or email info@wwfp.net
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
