It’s a question that is asked by many executors of wills in the UK: Do you have to pay inheritance tax before probate?
In this article we go over the process of probate and explain when and how inheritance tax needs to be paid.
What is Inheritance Tax?
Inheritance tax is a government tax on the value of someone’s estate after they have died.
It’s a tax of up to 40% on anything above your threshold. That threshold can vary depending on a number of factors, such as the gifts the deceased made in the last seven years, whether they had relatives and/or a spouse or civil partner at their time of death, and how they’ve left their estate to their beneficiaries in their will.
Because of the ‘nil rate band,’ if the estate’s value falls below £325,000 (2024), and no gifts outside of the exemptions were made in the last seven years, or if everything above that threshold is left to a spouse, civil partner, charity or amateur sports club, you won’t have to pay inheritance tax.
There are cases where this threshold can increase, such as if the deceased’s home is left to their children (including adopted, step or foster) or grandchildren. In this case, the threshold could rise to £500,000. If the deceased was predeceased by a spouse or civil partner, their nil rate bands may also be available to transfer, potentially taking the total tax-free estate up to £1 million.
Understanding Probate
Before we go any further, let’s clarify what probate is. In short, obtaining the grant of probate means getting the legal authority to deal with the property, money, and possessions of the deceased after they’ve passed.
As an executor, you must apply for probate before you can sell any properties or assets, or make payments to beneficiaries.
This can be done through a solicitor, an accountant licenced to undertake probate work, or you can fill out the probate forms yourself on the government’s website.
Related reading: Can an executor pay beneficiaries before probate is granted?
How long does the grant of probate process take?
The process of obtaining a grant of probate can take some time.
As of the first quarter of 2023, the average waiting time for both paper and digital applications was 10.8 weeks. However, this period can vary depending on a variety of factors such as the complexity of the estate, the completeness of the documentation provided, and the overall workload of the probate registry at the time.
It’s possible for some complex estates to take between 6-12 months.
Read more on gov.uk: https://www.gov.uk/inheritance-tax
Inheritance Tax and Probate: The Catch-22 Situation
Here’s the rub: you cannot apply for probate until you have paid the inheritance tax.
Yet, in many instances, you may need to sell property to get the money, to pay the tax, which requires probate.
You’re caught in a bit of a Catch-22 situation.
To make matters worse, HMRC only allows six months from the date of death for this payment to be made without charging the estate interest.
If you can’t pay the tax within six months, you’ll face interest charges and late payment penalties.
Paying Inheritance Tax Before Selling the Estate
So, how can you pay the inheritance tax before selling the estate?
There are a few options available to you:
Accessing the deceased’s funds
Under some circumstances, you might be able to access the deceased’s assets, such as their bank accounts, given you have permission to access the bank account and have the death certificate.
You can then pay the inheritance tax bill using money kept in bank accounts or building societies. Banks or building societies can often pay the inheritance tax directly from the deceased’s account, even if this has been frozen, under the Direct Payment Scheme.
Paying in instalments
There’s an option to pay the tax in instalments for assets which cannot easily be converted into cash, such as land, business interests, and certain holdings or shares.
The bill is divided by 10 and you can pay the instalments annually over ten years. HMRC will charge interest on the unpaid balance, but hopefully, the property would be sold prior to a second instalment falling due. Once the asset has been sold, the tax must be paid in full.
Executor’s Loan
Executors are not liable to pay inheritance tax from their own assets (although they can do if they wish and then claim the funds back from the estate once probate has been granted).
If the other options aren’t suitable, an executor’s loan might be your best option.
Executor loans or Probate loans are available from some banks and specialist lenders. A probate loan is essentially a short term loan that allows you to pay the inheritance tax bill and obtain the grant of probate.
Where to Get Help
Applying for probate or dealing with inheritance tax can be an overwhelming task, so it can be helpful to use a probate service provider who can deal with the full administration process. Make sure you fully understand the costs of this before signing anything.
Understanding how probate and inheritance tax works is an important part of an executors role.
You will find that there are many services that can do all or some of this for you. Which will undoubtedly be less stressful and time-consuming. You just need to be comfortable with the costs of these.
Many solicitors offer these services so that might be a good place to start.
If you find yourself in the catch 22 situation of needing to pay the IHT bill, but without sufficient cash from the estate, then a probate loan or executor loan may be helpful.
Please call us on 020 8301 7930 to see how these loans could work for you.
