When you inherit an estate, HMRC requires you to pay a tax on the value of the estate. The ‘death duty’ or inheritance tax (IHT) you pay will depend on the value of the assets of the estate. Currently, IHT is 40% and must be paid no later than six months after the date of death otherwise, the HMRC will start to charge interest.
There are ways to lower the IHT liability. This includes gifting the whole of the residuary estate to a legally married partner- ‘spousal exemption,’ or you can make a cash gift. This includes a personal allowance of £3000 annually which is free from tax.
But what happens in circumstances where the beneficiary or personal representative has limited financial means to pay the IHT? The assets in the estate cannot be used or accessed until probate is granted.
Delays in settling the tax debt are not ideal for the beneficiary or for the HMRC who can risk losing the tax, especially if the nature of the estate assets could alter in value.
Whilst there are options available, in this blog, we will look at grants on credit which could be the key to breaking the deadlock and an option you should consider if you have inherited an estate, but you cannot pay the IHT.
Grant of Credit
A Grant on Credit is a new application; however, it is usually only accepted in exceptional circumstances when the personal representative (PR) is unable to raise the funds needed to pay all the IHT. However, the PR must provide evidence that they have explored every practical effort to raise said funds.
If a PR can demonstrate that they satisfy both criteria, HMRC may then allow either part or all the tax due from the Estate to be written off. However, this Grant of credit will not be issued right away; the PRs must still pay as much of the tax due as they can unless HMRC writes all the tax off.
Tower Street Finance (TSF) recently reported [WHERE IS THE LINK?] that the HMRC are becoming increasingly reluctant to allow Grants to be issued without the IHT being paid. They now require documentation such as bank statements to confirm that there are insufficient funds in the PR’s accounts to pay the tax due.
In response to this reluctance, TSF has created a range of solutions to assist beneficiaries who are entitled to an inheritance from an Estate where tax is due but cannot be paid:
- An IHT loan product with no monthly repayments. The Estate repays TSF who have paid the tax to HMRC.
- Estate Expense Funding: A makeshift loan – once the Estate is placed in funds, the loan is repaid from the Estate proceeds.
- Inheritance advance – allowing beneficiaries to receive up to 60% of their entitlement if they can pass the required due diligence.
- Inheritance dispute funds can provide a beneficiary with funding to cover the legal costs if they believe they are not receiving their fair share of entitlement due from the Estate.
Examples of when a Grant on Credit would be considered (IHTM05124)
HMRC may postpone tax due if there are valuable assets that the PR cannot access without a Grant. For example, there may be funds in an account the deceased held which the bank will not release without the Grant. These funds therefore cannot be used to pay tax before the Grant is issued.
Risks associated with issuing a Grant of Credit
- HMRC still expects a non-UK resident PR to pay all tax due from the estate. In this instance, it is not advised to postpone tax repayments without providing valuable security in the event of a loan default.
- The exchequer may be at risk of tax loss should there be excessive delays in issuing the Grant of Probate. For example, stock market fluctuations may significantly alter the value of shares which would result in loss.
The Grant of Credit is an application which was introduced by HMRC to allow PRs access to the Grant of Probate when they otherwise would not be issued. However, HMRC has recently tightened their control on applications by requiring additional documentation before considering the applications. It is expected to become more difficult to obtain a Grant of Credit in the future, given it is HMRC’s last resort if inheritance tax cannot be settled.
If you are a beneficiary of an estate or know of someone who is and you require a solicitor for the probate or guidance about a Grant of Credit, then do contact our Private Client team who will be happy to assist you.
This is not legal advice; it is intended to provide information of general interest about current legal issues.