When a loved one passes away, managing their estate can be an emotional and complex process. One question that often arises is whether inheritance tax (IHT) needs to be paid before probate is granted.
Navigating this financial requirement can be confusing, especially since inheritance tax deadlines are stringent, and probate is necessary to gain control over estate assets. This process can feel overwhelming, particularly if you’re unsure about the order of steps and how to cover the tax if funds aren’t immediately available.
In this guide, we will explore the process, from understanding the relationship between inheritance tax and probate to exploring options if you need to pay IHT before securing the assets in the estate.
Inheritance Tax is a government tax applied to the estate of someone who has passed away, including property, money, and possessions. The current threshold for inheritance tax (as of 2024) is £325,000 – also known as the “nil-rate band.” If the estate’s value exceeds this, tax may be due on any amount above the threshold, typically at a rate of 40%.
There are, however, key exemptions. For instance, if everything above the threshold is passed to a spouse, civil partner, charity, or a community amateur sports club, no inheritance tax is owed.
Furthermore, the threshold can increase if the estate includes the deceased’s residence, which is left to direct descendants, like children or grandchildren. In this case, the nil-rate band can extend to £500,000.
If the deceased was previously married and their spouse has passed away, it’s also possible to transfer their unused threshold, potentially increasing the tax-free allowance to £1 million.
Before diving deeper, it’s essential to understand what probate is and why it’s required. Probate grants an executor or administrator the legal authority to manage the deceased’s estate.
Without it, assets like property, bank accounts, and investments generally remain inaccessible. For executors, obtaining probate is the first official step to distributing the estate, selling property, and settling debts.
In many cases, probate cannot proceed until inheritance tax is paid or an arrangement is made with HMRC. Executors face a tight timeline, as HMRC typically requires inheritance tax to be paid within six months of the person’s death to avoid accruing interest.
However, if funds are tied up in property or other assets, paying the tax upfront can be challenging – creating a Catch-22 where probate is necessary to access funds, but tax must be paid to secure probate.
In most cases, inheritance tax does need to be settled, or at least partially paid, before probate can be granted. If HMRC has not received payment by the six-month deadline from the date of death, they may begin to apply interest to the outstanding amount.
This interest charge can place additional financial strain on the estate, which is why it’s critical to understand the timelines and payment options available.
One complexity arises when a significant portion of the estate is tied up in illiquid assets, such as property or business shares, making immediate tax payment challenging. Fortunately, there are several approaches available to help cover IHT when cash isn’t readily available.
In some cases, you may be able to access the deceased’s bank accounts for the purpose of paying inheritance tax. Under the Direct Payment Scheme, certain banks and building societies are authorised to release funds directly to HMRC to cover IHT, even if the accounts have been frozen.
This option can be highly beneficial for executors, as it allows you to tap into available cash without having to wait for probate.
If the estate’s assets include hard-to-sell items such as property, land, or certain shares, HMRC offers an instalment payment plan. This allows the tax due on these assets to be spread over ten years, with one-tenth of the tax due each year.
However, HMRC charges interest on unpaid balances, so while this can ease the immediate financial pressure, it’s important to factor in the interest costs. Once the asset is sold, the remaining balance must be paid in full.
When neither direct payment from accounts nor instalments are suitable, some banks and financial institutions offer executor loans, also known as probate loans. This short-term borrowing option provides the funds needed to pay the IHT bill so that probate can proceed.
The loan can later be repaid from the estate’s assets once they become accessible. While executor loans can be helpful, interest rates and loan terms vary, so it’s wise to consider these carefully.
In situations where neither instalments, executor loans, nor direct payments from the deceased’s accounts are possible, HMRC may be able to postpone payment under certain conditions.
Executors can contact HMRC to request a delay, especially if selling estate assets is expected to take longer than six months. This isn’t a guaranteed solution, and HMRC will often require proof that all other payment methods have been explored.
Nonetheless, it can provide some breathing space for executors who are managing complex or cash-poor estates.
Dealing with inheritance tax and probate doesn’t have to be overwhelming. Here are some strategic tips to keep the process manageable:
Planning ahead is key to reducing inheritance tax liabilities. Here are a few strategies that can help minimise IHT for future estates:
Each of these strategies can effectively ease the financial impact on your heirs, ensuring that the estate is managed smoothly and with minimal tax obligations.
Navigating inheritance tax and probate can be challenging, but understanding the process and planning ahead can make a significant difference. Executors have several options for paying inheritance tax, even if the estate is cash-poor or dependent on illiquid assets.
Proactively addressing inheritance tax requirements before probate can streamline estate management, reduce potential penalties, and ultimately provide beneficiaries with a smoother inheritance experience.
Our customer care team at Evirtual Accountants will respond to your queries as soon as possible. We aim to provide you with the best possible service and look forward to hearing from you soon.
