When managing an estate, inheritance tax (IHT) can present a significant challenge for executors and beneficiaries.
Finding funds to pay this tax often proves difficult, especially before probate is granted. However, financial solutions are available, including loans designed specifically for inheritance tax obligations.
At Bridging Finance London, we specialise in complex financial situations, including estate administration and tax deadlines. Our expertise allows us to guide you through available options, ensuring effective management of inheritance tax payments without compromising estate assets.
This article provides general information about probate and estate distribution. It is not legal advice. Every estate is unique, and laws can change. Always consult a qualified legal professional or probate specialist before making decisions about estate administration, tax or inheritance.
Understanding Inheritance Tax in the UK
Inheritance tax in the UK applies to estates valued over £325,000, with a 40% tax rate on the amount exceeding this threshold. For instance, an estate worth £500,000 would incur a £70,000 IHT bill (40% of £175,000).
While the residence nil-rate band can increase the tax-free threshold for those leaving their main home to direct descendants. However, many estates still face substantial tax bills despite these allowances.
Inheritance tax must be paid by the end of the sixth month after the person’s death. Missing this deadline can result in interest charges and potential penalties from HMRC.
Consider this: You’re managing an estate valued at £800,000. The inheritance tax due would be £190,000 – a considerable sum to raise quickly, especially before probate is granted and estate assets can be accessed.
The Probate Catch-22: Why Estate Assets Can’t Be Used for IHT
One of the most challenging aspects of managing inheritance tax is what we might call the “probate catch-22”.
Here’s the situation:
- Inheritance tax (IHT) must be paid within six months.
- However, the executor can’t access most of the estate’s assets until after probate is granted.
This creates a significant problem: the tax needs to be paid to get probate, but the money to pay the tax is locked up until probate is granted!
Why is this the case?
Banks and other financial institutions typically freeze the deceased’s accounts upon being notified of the death. They require a grant of probate to prove that the executor has the legal right to access and distribute the estate’s assets.
This includes using those assets to pay inheritance tax.
Similarly, properties can’t be sold without probate, as the executor doesn’t have the legal authority to transfer ownership (or create mortgages) until probate is granted.
There are a few exceptions:
- Joint accounts: The surviving account holder can usually continue to access these.
- Small amounts: Some banks may release limited funds for funeral expenses or to pay inheritance tax, but this varies by institution and is often insufficient for larger estates.
- Life insurance policies written in trust: These pay out without requiring probate as they are outside of the estate.
However, for many estates, these exceptions aren’t enough to cover the inheritance tax bill. This is where specialised financing solutions become important.
Types of Loans Available for Paying Inheritance Tax
Several loan options can help executors and beneficiaries manage inheritance tax payments:
Executor Loans
Executor loans are designed specifically for inheritance tax situations. These loans cannot be secured against an estate owned property, as estate assets cannot be used as security before probate is granted.
A key advantage of executor loans is rapid access to funds, often within 7 days of application. This quick turnaround is crucial when facing tight HMRC deadlines.
Probate loans are attached to the estate value, with repayment from the estate once probate is received.
Loan amounts vary but are often based on the expected inheritance tax liability. Interest rates are higher than standard loans due to the short-term nature and the risk involved.
Probate Bridging Loans
In some circumstances a bridging loan is preferable for probate and estate costs. These are not able to be secured against estate property before probate (executors do not have the legal right to do this).
So most probate bridging loans are taken out by executors and secured against their own homes, with all of the usual risks this comes with. These loans are often used because they are cheaper than pure probate or estate loans, or where a lower amount needs to be borrowed.
Personal Loans
Personal loans can be an option for smaller inheritance tax bills. These unsecured loans are based on an executors creditworthiness and income, rather than estate assets.
While personal loans may have lower interest rates than specialist executor loans, they often have stricter eligibility criteria and lower borrowing limits.
Other Options
- Life insurance policies: Some individuals take out life insurance policies specifically to cover potential inheritance tax liabilities.
- Deferred payment plans: HMRC offers a limited option to pay inheritance tax in instalments over 10 years for certain types of assets, primarily property and business assets.
- Family loans: Borrowing from family members can be an option, but it’s important to document terms clearly to avoid future disputes and potential tax implications.
The Process of Obtaining a Loan for Inheritance Tax
Securing a probate loan to pay inheritance tax involves several steps:
- Initial assessment: Evaluating the estate’s value, tax due, and potential loan amount needed.
- Documentation gathering: Providing various documents, including the death certificate, will, probate application, and estate accounts.
- Loan application: The lender reviews your application, considering the estate’s expected value.
- Approval and funds disbursement: Once approved, funds are typically released quickly, often within a few days.
To streamline the process, prepare a file containing the death certificate, will copy, probate application forms, detailed estate accounts, property valuations, and any HMRC correspondence.
Benefits and Considerations of Using a Loan for Inheritance Tax
Opting for a probate loan to pay inheritance tax offers several advantages:
- Quick access to funds: Allows you to meet HMRC deadlines and avoid penalties.
- Asset preservation: Avoids hasty sales of estate assets at potentially reduced prices once probate is granted.
- Time to maximise value: Provides breathing space to plan the best strategy for managing estate assets.
- No personal liability: Executors have no personal liability for pure probate loans
However, it’s important to consider potential drawbacks:
- Cost of borrowing: Interest and fees will be added to the original amount borrowed.
- Complexity: Managing a loan adds another layer to the estate administration process.
When deciding whether to use a loan, consider the estate’s expected value, the nature and liquidity of assets, current market conditions for asset sales, and anticipated timelines for probate and estate administration.
How We Can Help
We specialise in finding tailored financial solutions for complex situations like inheritance tax payments.
Our extensive network of lenders, including private banks and specialist finance providers, allows us to secure competitive terms for executor loans.
We understand the unique challenges of paying inheritance tax before probate, and our team has the expertise to navigate the intricacies of UK tax laws and financial regulations. Whether you’re dealing with a straightforward estate or a complex portfolio of assets, we can help you find the most appropriate funding solution.
Remember, thorough administration takes time but ensures that the deceased’s wishes are carried out correctly and legally. If you find yourself struggling at any point, don’t hesitate to seek professional advice. Numerous resources are available to support you through this process.
You can find links to useful resources here.
