Not all Estates will need to pay Inheritance Tax. This depends on a number of factors, including the circumstances of the deceased person, their Beneficiaries and the size of the Estate. If an Estate is liable to pay Inheritance Tax it will be necessary to pay this to HM Revenue & Customs before Probate can be granted.
This is because the Court will not issue a Grant of Probate (where there is a valid Will) or Letters of Administration (where there is no Will) until they receive a stamped receipt from HM Revenue & Customs confirming that the Inheritance Tax has been paid. This receipt is sent as part of the full Inheritance Tax return (IHT421 form).
There are a number of procedures which can help to make payment of Inheritance Tax more manageable.
Direct Payment Scheme - Firstly, many banks, building societies and other financial institutions are part of the “Direct Payment Scheme”. This scheme allows money from the Estate to be paid directly to HM Revenue & Customs before Probate has been granted, provided that the account is in the sole name of the deceased. If you intend to use this scheme you should contact the banks in advance and find out what information and paperwork they will require from you so that you can get this arranged.
This will help to avoid any delay in paying the Inheritance Tax, which is important because HM Revenue & Customs start to charge interest on Inheritance Tax after the end of the sixth month after the date of death. So, for example if the deceased died in December, the tax will be due by the 31st June. You will have to fill in a form IHT423 for each bank that will be making payment and then send this to the banks at the same time as you send the full tax return (known as form IHT400) to HM Revenue & Customs.
Pay Inheritance Tax in Instalments - Another option that can sometimes assist the Executor is them choosing to pay the Inheritance Tax in annual instalments, over 10 years. Please note this option is only available where the Inheritance Tax is chargeable on:
Certain holdings or shares (generally either company shareholdings that give the owner control of the company, or a large holding of shares in a company that is not listed on the stock exchange).
If you choose to pay in instalments, interest will not be charged on the first instalment unless you miss the payment deadline. For each later instalment, interest will be charged on the whole unpaid portion of Inheritance Tax for the year.
It is important to note that if you decide to go for the instalment option, the Inheritance Tax should be paid as soon as possible once the asset on which this option applies has been sold.
Apply for an Executor’s Loan - As an Executor, you are not liable to pay Inheritance Tax from your own assets. If the two options above do still not enable you to pay the inheritance tax, you can apply for an “Executor’s loan”. Generally banks offer these loans at their standard loan rates.
If you will need an Executor’s loan you should contact the bank you intend to obtain this from as soon as possible to find out their requirements. You will need to be able to provide them with details of the assets and liabilities (debts) of the Estate. You will also need to repay the loan as soon as possible once you have obtained access to the Estate funds, so that the Estate does not continue to be charged interest on the loan.