Sometimes, when a loved ones die, their heirs find that they can’t pay Inheritance Tax. This is often because much of the value of a person’s estate is locked up in property. Normally, this will be their family home, but it could also be any buy-to-let properties they own. If you are in a position where you can’t pay Inheritance Tax (IHT), it can cause a major headache. In this article we look at how you could solve this problem.

What is Inheritance Tax?

If you’re unfamiliar with the rules relating to Inheritance Tax, we’ve written a guide to help you. In brief, Inheritance Tax applies if an estate is worth more than £325,000. When a person leaves their estate to their spouse or civil partner, no tax is payable. Furthermore, the person passes on their own £325,000 allowance to the surviving partner. This means they have a tax-free allowance of £650,000.

In addition to this, there are various reliefs or exemptions that may apply. For example, if a person owns their home, it may qualify for the residential nil-rate band. This adds another £175,000 tax-free allowance to the estate.  For full details on Inheritance Tax rates and rules, visit this page.

When do I need to pay Inheritance Tax?

Inheritance Tax is normally charged at 40% of an estate’s value after allowances, reliefs and exemptions have been taken into account.

You are supposed to pay any IHT by the end of the sixth month after a person died. You must pay it before you can get a ‘grant of representation’, otherwise known as probate. If you don’t pay IHT in full by the deadline, HMRC will charge you interest.

Normally, you will use the deceased person’s assets to pay IHT. These might include money in savings accounts, stocks and shares, insurance pay-outs or investment bonds.

What happens if I can’t pay Inheritance Tax?

Sometimes you can’t access all the deceased person’s assets, meaning you can’t pay Inheritance Tax. This often happens because you’ve been unable to sell their home by the IHT payment deadline.

In these cases, you may be able to apply to HMRC for a grant on credit. If this is granted, you’ll need to sign a legally binding undertaking to pay any outstanding IHT within an agreed timescale. However, if paying the tax requires the sale of a property, you will need an accepted offer and an estimated date for the exchange of contracts. This is because HMRC can’t issue an open-ended undertaking.

How do I apply for a grant on credit?

If you can’t pay Inheritance Tax in full, you must first liquidate as many assets from the estate as you possibly can and pay these over to HMRC. Only when you have exhausted the alternatives can you apply for a grant on credit.

To apply for a grant on credit, you need to follow these steps:

  • Complete and sign IHT account form IHT400
  • Write to HMRC confirming that you are unable to release funds from the estate
  • Tell HMRC the maximum amount you can pay
  • Tell HMRC what steps you’ll take to raise the outstanding IHT

How does HMRC decide whether to issue a grant on credit?

If you can’t pay Inheritance Tax, HMRC will consider your application for a grant on credit on its merits. For this reason, it’s a good idea to make your application as detailed as possible.

If I get a grant on credit, will I still need to pay interest?

While a grant on credit can help you meet your IHT obligations, it doesn’t exempt you from interest payments. You’ll pay interest on any outstanding Inheritance Tax after the end of the sixth month after the person died.

I’ve been refused a grant on credit. What do I do?

If you are refused a grant on credit, it’s a good idea to seek independent financial advice. It may be cheaper to take out a loan than to pay interest to HMRC. If much of an estate’s value is tied up in property, it’s wise to try and sell it as soon as you can. That way, there’s a much stronger chance of meeting the IHT deadline.

Can you help me with IHT?

Yes, THP’s accountants can help you with IHT planning. We aim to help you use legal methods to pass on as much of your estate as possible to your heirs, rather than to the taxman. We can also help you with other elements of estate planning, such as writing a Will and setting up a Lasting Power of Attorney. If you’d like to learn more, speak to a member of our team today.

Need further advice on any of the topics being discussed? Get in touch and see how we can help.

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    About Ben Locker

    Ben Locker is a copywriter who specialises in business-to-business marketing, writing about everything from software and accountancy to construction and power tools. He co-founded the Professional Copywriters’ Network, the UK’s association for commercial writers, and is named in Direct Marketing Association research as ‘one of the copywriters who copywriters rate’.

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