Inheritance tax: how will the tax bill actually be paid?

Inheritance tax: how will the tax bill actually be paid?

Inevitably, with a Budget coming up, thoughts turn to what may be in it and, this time, what taxation changes it may contain and how far taxes may go up.

On inheritance tax, we are aware of some of Andy Burnham’s thinking about widening the taxation funnel so more lower-value estates may fall in, but that is not necessarily Government policy. But it does bring into question, both for the present system and any replacement death-based tax in the future, how that tax bill is paid.

The question nobody asks: how is the tax paid?

It’s worthwhile thinking about what is possible and what isn’t possible under the current system. I’m not proposing to look at the topics of exemptions and reliefs here, but at the mechanics of inheritance tax payments themselves, as frequently these are not appreciated in advance of estates and families coming up against them.

When inheritance tax can be paid by instalments

The part of the inheritance tax bill which arises by reason of value in ‘land and buildings’ and any ‘Agricultural Property Relief’ claims and/or any ‘Business Property Relief’ claims at less than the 100% relief value discount is chargeable to inheritance tax and is payable by instalments, by concession.

That option to pay by instalment continues for a 10-year period from the date of death, or until sale of the asset in question, at which point the inheritance tax proportionately due on that asset must all be paid at that point.

You’ll see that this eases the cash flow ‘crunch’ that otherwise estates have, especially where they are ‘property heavy’.

As long as that first instalment can be afforded, and perhaps there is an income stream which at least partly pays subsequent instalment payments, this can be a huge benefit to estates and prevent there needing to be a ‘fire sale’ of assets just to pay the inheritance tax bill.

The cost of paying by instalments

As with all things helpful from HMRC, there is a drawback, which is that interest is chargeable on the unpaid balance of taxation owing. At certain points when we’ve had base rates close to zero, that has made the instalment option an extremely soft loan for estates and families. But that’s not the case at the moment, with interest accruing at 7.75%.

Many families, when faced with that sort of rate of interest on the accrued balance, are choosing to pay off all, or substantially all, of the instalment option tax as soon as possible rather than run into that sort of interest.

When the tax bill cannot be paid by instalments

That leaves the non-instalment option inheritance tax bill due on cash and investments and valuable possessions. That must be found within six months of the date of death and that can be difficult.

We can sit down with you and calculate not only what the potential inheritance tax bill is on your estate, but we can also then discuss the likely instalment inheritance tax bill and the non-instalment inheritance tax bill.

We can look with you at how, in particular, the non-instalment tax bill can be paid and the extent to which the instalment option will need to be used. We can also, by doing that, highlight where there may be difficulties in the future if matters remain as they are.

Planning ahead for cash flow

This is where a degree of ‘cash’ in an estate is helpful because cash can be accessed before grant of probate to pay inheritance tax bills. Estates which are particularly cash-illiquid can be problematic. That is where, sometimes, we can facilitate the instruction of probate lenders who will lend monies to pay inheritance tax bills.

The importance of planning in advance

All of this is best dealt with in advance, rather than by your family after your death when there are few options open.

For more information about this service and to arrange a fixed-fee meeting to discuss it, please contact our Private Client Team