Private Client specialist, Ovid Busette looks at the options for paying Inheritance Tax and what these might mean for your family.
The current Inheritance Tax (IHT) threshold
Inheritance Tax in the UK is currently taxed at a rate of 40% on assets in excess of the current inheritance tax allowance or ‘nil rate band’, which for all individuals who are domiciled in the UK is currently £325,000.00. Since 2007 it is possible for spouses or civil partners to transfer the ‘nil rate band’ to each other on the first death so that the surviving spouse’s estate can benefit from a double ‘nil rate band’ or the transferrable ‘nil rate band’, as it is called, of £650,000.00.
In 2017 the government introduced the residence ‘nil rate band’, which allows individuals who leave their property to ‘lineal descendants’ (children, grandchildren etc.) to benefit from a further increase to their ‘nil rate band’ of £175,000.00 (for this current tax year) which is also capable of being transferred between spouses and civil partners. Therefore:
- If you are married or in a civil partnership with children and a property, your estate can benefit from a ‘nil rate band’ of £1,000,000.00.
- If you are unmarried or cohabiting with no children, you would only be entitled to a ‘nil rate band’ of £325,000.00.
During the 2019/20 tax year HM Revenue & Customs (HMRC) reportedly made £5.2 billion from Inheritance Tax. This is a decrease of 4% from the previous tax year, which is attributed to the use of the residence ‘nil rate band’ by estates since its introduction.
Difficulties paying Inheritance Tax (IHT)
However, despite the introduction of the residence ‘nil rate band’, payment of inheritance tax can still be an issue as the value of property, despite the COVID-19 pandemic, has increased. In addition not everyone is entitled to the £1,000,000.00 ‘nil rate band’ as pointed out above.
Where an estate is liable to inheritance tax, the personal representatives of the estate have until the end of the sixth month from the death of the deceased to pay inheritance tax. Evidence that the inheritance tax has been paid must be presented to the Probate Registry, before a Grant of Representation or Probate, is issued. This can present significant difficulty for bereaved families if the most valuable asset in the estate is the deceased’s property.
The question then arises, what are the options for paying Inheritance Tax?
Bank Loan and Insurance
Personal representatives can apply for a loan to pay inheritance tax using the assets of the deceased’s estate as security. It is also possible for individuals, while they are alive, to take out an insurance policy to cover the cost of paying for inheritance tax, if they believe that their estate will be liable to inheritance tax. In both instances advice should be sought from a financial advisor on the viability of both options, including the interest rates of the loan and the cost and affordability of the policy premiums.
The instalment option
Thankfully it is possible to pay inheritance tax in instalments if the estate is comprised of the following assets:
- Listed shares or securities where the deceased had more than a 50% controlling interest in a company
- Unlisted shares in a company that are worth more than £20,000.00, and
- The shares represent 10% of value of the shares in the company at the price they were first sold or
- The shares represent 10% of the value of the ordinary shares in a company, at the price they were first sold.
- Gifts of buildings, business shares or securities given by the deceased (although the later must be unlisted shares at the time of the deceased’s death)
It will also be possible to pay inheritance tax in instalments, if the personal representative can show that paying in one lump sum will cause financial hardship.
The inheritance tax must be paid in 10 annual instalments, with the first instalment due at the end of the sixth month after the deceased’s death. Interest is not charged on the first instalment but on later instalments. Interest is charged on the total value of the outstanding tax as well as on any instalments that are not paid on time. Furthermore, if the asset which allows the inheritance tax to be paid in instalments is sold (for e.g. house or shares) then the full outstanding balance of the tax must be paid.
However, please note that it is possible to pay the full inheritance tax due at any time, which may save the estate the additional expense of interest charges.
Expert legal advice
The payment of inheritance tax can present challenges, particularly for estates where the main asset is a property. Personal representatives and individuals carrying out any tax or estate planning should consider the above options, as well as utilising available and relevant tax allowances to reduce the inheritance tax liability to their estates.
For further advice on Inheritance Tax, please contact a member of our experienced Private Client team.