One of the most common questions when dealing with an estate in the UK is: “Who actually pays the inheritance tax?” The answer is crucial for the executors managing the estate and the beneficiaries set to inherit.
Inheritance Tax (IHT) is a tax on the value of a deceased person’s estate (their property, money, and possessions). The estate only becomes liable for IHT if its net value is above a certain threshold (currently the £325,000 Nil Rate Band and possibly the £175,000 Residence Nil Rate Band if available).
The simple answer is that the estate itself is responsible for paying the tax before any assets are distributed to beneficiaries. However, the legal responsibility for ensuring the tax is paid falls squarely on the executors or administrators of the will.
How is the Inheritance Tax Paid?
Executors must pay the IHT before they can receive the Grant of Probate of Letters of Administration. This document proves their authority to sell assets like property or access bank accounts. This creates a slight paradox: you need the Grant to access the money, but you need the money to get the Grant.
HMRC understands this and they offer several ways for executors to pay the tax before probate is granted:
- Direct Payment Schemes: Executors can arrange for banks or building societies holding the deceased’s money to pay HMRC directly.
- Paying by Instalments: For certain assets that are difficult to sell quickly (like property), the IHT can be paid in yearly instalments over 10 years. The first instalment must still be paid before probate is issued and it is important to note that interest is charged on the outstanding IHT.
- Using Personal Funds: Executors can pay the tax themselves and reimburse themselves from the estate once probate is granted.
- Obtaining a loan: Executors can take out a bank loan or secured loan specifically for payment of IHT. Securing a loan will depend on the estate financing and the Executors finding a company with reasonable fees and interest rates as they must justify taking out a loan over paying by instalments.
When Does Inheritance Tax Have to Be paid?
The Executors have 6 months from the end of the month of death to obtain details of the estate and pay the tax due.
When are Beneficiaries Responsible?
In the vast majority of cases, the beneficiary receives their inheritance free of IHT, as it has already been settled by the estate.
However, there are specific, less common situations where a beneficiary might become responsible for a portion of the tax:
- Gifts made within 7 years of death: If the deceased made large gifts in the seven years before their death that are now taxable (Potentially Exempt Transfers), the recipient of that gift may have to pay the IHT on that specific gift if the estate’s allowance is used up.
- Inheriting a specific asset that wasn’t covered by the main estate funds. Sometimes a gift in a Will can be made subject to IHT in which case the beneficiary may be responsible for any tax on that gift.
Summary
For most estates, the responsibility rests with the executors to use the funds within the estate to settle the Inheritance Tax bill with HMRC before any money or property is passed on to the heirs.
If you are an executor, understanding these duties early is vital to ensure a smooth probate process and avoid personal liability for any errors or missed payments. Seeking professional legal advice can ensure all tax obligations are met correctly.
We Can Help
Dealing with an estate can be complex and emotionally challenging. Our private client specialists can guide you through the administration process, advise on inheritance tax that might be due and options available to the estate.
If you need advice following the death of someone, contact us to discuss your options.
