The Practicalities of Paying Inheritance Tax

The payment of inheritance tax of estates would appear to be a growing problem for personal representatives. In 2009/10, just 2.7% of estates were subject to inheritance tax, whereas in 2015/16, this has risen to 4.2% of estates, and there is a projection in 2021 that this will increase to 6% of estates. 

Any impact that the introduction of the resident nil rate band, has had on the percentage of estates subject to inheritance tax remains to be seen. Clearly with an election in progress, post the result is almost certainly going to mean a change in the way inheritance tax is dealt with. 

With the above in mind, now is a good opportunity to offer some comment on the practicalities of paying inheritance tax, and the options available in different circumstances. 

As a company we often deal with complicated administrations, including those where inheritance tax is due to be paid, but there are insufficient liquid assets to pay the inheritance tax in the first place. 

For some personal representatives, the payment of inheritance tax can be relatively straight forward, if the estate has sufficient cash in it, the executors can generally arrange payment through the direct payment system/scheme, and by completing the appropriate form from the HMRC. There are some financial institutions that do not participate in the direct payment scheme, though most will offer an alternative way of arranging payment out of the accounts held with them, in order to facilitate the payment of tax due. If the estate does not have sufficient cash but the personal representatives do, they can also personally arrange payment of the tax due, and later seek to recover this from the estate. This is not a luxury afforded to many personal representatives, however and there is often no guarantee of when they may expect to recover their personal monies. This can be due either to the current Probate Registry delays, or the nature of the estate assets,  they mean that this can take some time for the asset to be sold. 

We find that for the majority of personal representatives, the above is not an option and they find themselves in a situation whereby the estate assets require a Grant of Representation in order to sell the same, but the personal representatives are required to pay the inheritance tax first, in order to obtain the Grant of Representation, they are therefore left with a number of options, which we will explore, and the common options are those listed below. 

First point of consideration is, whether the estate could pay the inheritance tax due in instalments. The taxpayer on the value of land, businesses, shares/securities, which gave the deceased control of a company, and on certain unquoted shareholding, can be paid in ten annual instalments. This can mean that only a portion of the total tax due is payable prior to obtaining the Grant of Representation. The instalment option ends upon the sale of the asset(s) for which it was utilised, but of course the sale of the asset ought to give the personal representatives sufficient monies to fund the remaining tax due in any event. One often overlooked point with regard to the instalment option, is that if the inheritance tax account and supported application is submitted more than one month prior to the due date for payment of the inheritance tax (being the end of the six months following the death), then no instalment technically falls due, and the Grant of Representation can be obtained simply by paying the tax due on the assets that do not qualify for the instalment option 

In our experience, most of the value in a typical estate is in assets that qualify for the instalment option (property), and the tax payable on the assets that do not qualify for forms, only a smaller proportion of the total tax bill. With that said, it is not uncommon for the personal representatives to acquire a significant amount of time to collate the necessary information required in order to prepare the inheritance tax account. It is therefore not always possible to get an account submitted more than a month prior to the due date. 

It should be noted that outstanding tax payable after the due date occurs, attracts an interest currently at 2.5% above the Bank of England base rate. It is therefore not a perfect solution, but one that is often unavailable. 

If the personal representatives do not have the means to pay the tax payable prior to an issue of a Grant of Representation, even with the instalment option factored in, they are left with two main options (there are more complex payment options available in certain circumstances, such as the transfer of land or chattels, but we propose only to address the most common examples). 

The first option is to consider using some lending facility. Typically this is in the format of a bridging loan, to cover the tax due with the estate assets used as security for the same. Once the estate assets are sold, the bridging loan can be repaid. 

The first question to consider was whether Section 33, applied to the gift to the son who predeceased? If so, then the second question was, did the same condition apply to his children inheriting under Section 33? 

The law as it currently stands. 

A well-established exception to the doctrine of lapse, is Section 33 of the wills act 1837. This Section provides that where a testator makes a gift in their will to their own child, or remoter descendants, this gift will not fail if the beneficiary dies, leaving issue of their own, subject to any contrary intention in the will. This means that if a testator makes a gift to a child, and said child dies before them leaving children of their own, who are living at the testator’s death, then those grandchildren of the testator will take the gift instead. If there are multiple surviving issue, then they will take the part of the estate in equal shares between them. 

The second option is to consider applying to HMRC, to release the appropriate form to the Probate Registry, to obtain the Grant of Representation, in cases where the inheritance tax is payable. On a Grant on ‘credit basis’, where they will generally request an undertaking from personal representatives, to pay the tax when they are in funds. This is considered by HMRC to be a last resort, where lending options have been exhausted. With that said, HMRC will also require a substantial amount of information in relation to the estate, particularly where there is land and property and businesses, to ensure the correct valuations are made. As previously indicated, an undertaking will have to be provided by the personal representatives, that they can clearly see that all the cash assets have been used to make payment on account, or the tax due, and at HMRC are generally satisfied with the suggestion, including the time limit considered.  

Ultimately, the personal representatives would have to way up the interest in any other monies payable, on any lending arrangement against the interest, and any other monies payable to HMRC for the late payment of the tax due. Time will also be a factor, in that we have found that most lending facilities can be arranged much quicker than it can take HMRC to respond to a request for a Grant on credit. However, there are a number of cases where this has just not proved possible. 

Often in cases such as this, at the end of the day a corrective account will be submitted to HMRC, for any IHT which may have the result that the IHT is reduced. 

It is clear that the payment of inheritance tax is a bigger headache for some personal representatives than it is for others. This is becoming a more increasing event because of the values of properties, particularly in London and the South East, where it is not uncommon to see a fairly standard property now being valued in excess of 1 million pound. It is unfortunate that the current interest charging regime, does not distinguish between cases where payment of interest is an unavoidable consequence of the nature of estates assets, and cases with apathetic personal representatives, who have failed to arrange the payment of the inheritance tax due in a timely manner. 

If you require any advice, please do not hesitate to contact us.