Inheritance Tax – Can’t Pay, Won’t Pay?
What do you do if there’s no money to pay inheritance tax?
One in five people aged over 65 has a household wealth of more than £1 million*. Each year more families are being faced with having to pay inheritance tax when a relative dies.
An issue that often arises is where the money is going to come from to pay the inheritance tax. Not everyone who dies leaves enough cash assets to pay the tax bill.
In this article, I want to consider the options open to the deceased’s executors and look at their responsibilities regarding paying inheritance tax.
How quickly does inheritance tax have to be paid?
Inheritance tax becomes payable within 6 months of the end of the month in which the death occurs. If there is tax due the personal representatives must work out how they are going to set about paying it. If the tax isn’t paid on time HMRC will add interest and penalties.
What options are available to PRs for paying tax?
If there isn’t enough cash readily available to pay tax the personal representatives are going to have to find it from somewhere else. Here are 4 possibilities:
Loans – it is possible to approach the deceased’s bank for a loan to pay inheritance tax. These are usually short term loans which the personal representatives should repay as soon as possible. This option may be the best solution in some cases but it does add extra expense.
Instalments – HMRC allow personal representatives to pay inheritance tax relating to non-moveable property e.g. land in instalments. The payments can be made annually over a ten year period. HMRC will charge interest on the instalments.
Beneficiaries – There may a beneficiary who is able and willing to lend funds, particularly if they think it will help to speed things up.
Variation – There are some situations where the PRs may be able to vary the terms of the deceased’s Will or the effect of the intestacy rules to pass assets to IHT exempt beneficiaries such as spouses or civil partners or charities. This can be achieved by a document known as a Deed of Variation.
What are the risks for personal representatives if IHT is due?
It is the responsibility of the appointed executors or administrators of the estate to pay any tax due from the deceased person’s estate. If you’re a PR (personal representative) and you fail to pay the tax you could be held personally liable. What does that mean? It means the beneficiaries have the right to make you compensate them for any penalties and interest imposed by HMRC.
What steps should PRs take when inheritance tax is payable?
Personal representatives must take great care when dealing with taxation issues. The best approach is to have a plan of action. Here are some suggestions:
- Make a diary note of the inheritance tax deadlines;
- Get several copies of the death certificate – that will help to avoid delays;
- Start to get assets valued as quickly as possible;
- Make sure you keep accurate accounts and regularly update them.
- Work out roughly how much money you’re going to need and start planning how to get it;
- Engage a professional to complete the IHT forms for you – it limits your risk of personal liability!