Importance of ensuring you have sufficient cash to pay for any inheritance tax liability

If you are fortunate enough to be expecting an inheritance, then you may also be worried about the downside of any windfall. Specifically, inheritance tax. Inheritance tax means you have to hand part of the value of the estate over to the government, and it can be substantial.

Where the inheritance is in the form of land or a property, this becomes particularly challenging. It is possible that the beneficiary does not have enough in cash to necessarily cover a significant sum. The Executors, the individuals responsible for administering the Estate, can be stuck in a ‘catch 22’ situation. The assets of the Estate, i.e. a property, cannot be sold until the process known as Probate, is complete. The includes valuing all the assets and paying any tax due. But the Executors could find that they do not have enough cash to pay the tax, to finalise Probate, to be able to sell the assets. In this situation it could be they have to borrow, possibly even from the beneficiaries, to pay the tax, in order to sell and distribute the Estate. This is exacerbated further if the Estate includes land or a property which the beneficiary(ies) wish to retain. In which case they have to find the cash in order to retain the asset.

So, what is inheritance tax, and what should you be thinking about?

Inheritance Tax Overview
Inheritance tax is typically paid at a rate of 40% on everything above the applicable threshold. While the threshold can vary based on individual circumstances (a topic we’ll cover in more detail another time), it’s worth noting that more estates are becoming liable for IHT each year. This is due to rising property values and frozen thresholds, meaning many families are caught off guard.

Ways to Avoid Paying Inheritance Tax

Effective planning can significantly ease the burden of Inheritance Tax.
It’s worth sitting down with your family and discussing how to avoid or reduce inheritance tax. Here are some practical strategies to consider:
1. Use the threshold and allowances carefully, thinking years in advance to make use of certain 7 year gifting rules (The dilemma of gifts for grandchildren – FH Manning Financial Services Ltd in Horncastle
2.  Setting up a trust. This is complicated, and you should not try to do it without a financial advisor.
However, when properly done, a trust can significantly reduce inheritance tax liability and your exposure. Many trust transfers are also subject to the seven-year rule
3.  Invest in assets which qualify for reliefs, such as business relief or Agricultural relief. These may now have limitations but can still be incredibly valuable to the Estate
4.  Insure the potential liability, this also ensures that the Estate has cash to pay any liability and as long as it is written under Trust, falls out of the Estate
5.  Make small regular gifts, either out of income or up to £3000 a year, to gradually address the problem

So what If You Can’t Pay the Tax?
Problems paying the tax are common.
Tax must be paid by the end of the sixth month after the person died, and if you’re late, then HMRC will charge you interest. You also need to make some kind of payment before probate. In other words, the tax is due before you receive any money from the estate, although you don’t necessarily need to pay the full amount.
If the estate lacks liquid assets, i.e. if it consists primarily of a large property portfolio, it can be a real challenge to get the money in before the deadline.

You can make payments without knowing exactly what is due, but be careful not to overpay.
Often, people take money from the estate to pay the tax, such as from bank and building accounts, stocks, and bonds.

If you can’t access the estate and don’t have the money, you can request a postponement, until after you get probate, but you will have to pay the outstanding tax right away. On top of that, if you’re trying to sell property, it will be tagged with a ‘notice of the Inheritance Tax charge.’ Many buyers won’t finalise the purchase until the notice is removed…meaning it may not be possible to sell a home and then pay the tax from the proceeds.
This can put families in situations where they have to sell other assets…imagine having to sell your home so you can get your parents’ home (which you plan on selling because it’s not geographically where you want to live).

Who Is Responsible for Paying the Tax?
The executor of the will is the one who has to pay the tax. They typically request for the money to be transferred from the deceased person’s bank account. If there’s no will, the administrator of the estate is responsible.
Make sure everyone in your family has written a will. It makes things much, much easier. Talk to a qualified, experienced estate planner about wills, probate, and choosing the right executor.

How To Plan for Estate Tax
First of all, get the estate appraised periodically, especially if you aren’t sure where you are in relationship to the threshold. Remember that the tax only applies on amounts over the threshold.
You could set up a special savings account dedicated to covering the tax. Keep the appraisal on the estate updated and make sure you have that money in there so you can pay the tax right away.
The rules around Inheritance Tax are complex, and no two situations are the same so you should probably talk to a financial advisor, especially if your family is thinking about setting up a trust. We can help with this. We have advised on Estate planning for 50 years. so please feel free to contact us through my website here or via mail@fhanning.co.uk to set up a time to sit down and discuss inheritance tax planning.