In the UK, only a small percentage of estates are subject to inheritance tax, or roughly 1 in 20 UK estates. If you are one of the beneficiaries or givers, it’s wise to do inheritance tax planning beforehand to avoid the hefty IHT bills or interests.
There are several ways to do that, especially when you are the owner of the asset who doesn’t want the beneficiary to sell what you give them just to pay IHT. Inheritance tax planning is most crucial if you want to have the peace of mind that your beneficiaries really receive your assets, and not have to dispose of them for the sake of IHT liabilities.
However, we put ourselves on the perspective of the executor or administrator of the estate, not the owner of the asset, covering a brief and simple discussion of inheritance tax, how much you will pay for it, who pays exactly this tax, how it is paid, and most especially, what to do when you don’t have enough funds to pay IHT.
What Is Inheritance Tax and How Much Do You Pay for It?
Inheritance tax (IHT) is the tax you pay for an estate handed to you when the giver has died. The assets include any possessions, property, and money. Up until 2026, inheritance tax is at the standard rate of 40 per cent and is only paid when the asset’s value exceeds the nil rate band (NRB) or threshold on which you are free from tax, set at £325,000.
Anything above that threshold, you will be liable to paying inheritance tax at a standard rate of 40 per cent. For instance, the beneficiary is left with an estate worth £500,000. Given your nil rate band of £325,000, the taxable amount will be £175,000. Forty per cent of this amount is £70,000, which is what you will pay for the inheritance tax.
This threshold can increase on certain situations, such as when the asset is given by the deceased person to his/her children or grandchildren (up to £500,000) or to a widower or surviving civil partner. When the latter happens, the surviving spouse can utilise the unused NRB of the deceased, doubling his/her NRB to £650, 000.
Who Pays Inheritance Tax?
When the deceased person has a will, he is called a testator and has already appointed the care of the assets to an executor, who is usually an accountant, a lawyer, or a family member, for as long as they are over 18 years of age and have no previous felony records.
If there is no will, then the court appoints who the executor will be, but usually, it is the administrator of the estate’s default responsibility. In this case, you act as a personal representative, as there is no record of a will.
You can be both an executor and the beneficiary too. If you are the executor, then you are responsible for clearing any debts the deceased person has, most especially the taxes they owe—inheritance tax—and carry forth the wishes of the said person.
Executors are either paid or not for their efforts in handling the estate, and have the liberty to accept the testator’s payment or not. When you are given this responsibility, you are expected to settle it right away to avoid any charges from HMRC.
How is Inheritance Tax Paid?
After six months from the asset owner’s death, IHT should already be paid or HMRC will begin imposing interests. You can pay IHT through the funds within the estate or monies earned from selling it.
As the executor, you can do “payment on account,” which is paying IHT on the first six months of the person’s death, even before the estate completed the valuation, to reduce any interests that could be charged on you if it takes you longer to sell the assets for the purpose of paying inheritance tax and other corresponding taxes.
If you pay through your own account, then you can claim the expense back from the estate. However, IHT is usually paid through the Direct Payment Scheme (DPS) wherein the money used to pay IHT is from the deceased person’s own bank or building society account. As the executor or personal representative, you can arrange the tax bill to be paid directly through the scheme, whether in half or full.
Don’t forget to check as well if the deceased person has arranged to pay inheritance tax through a whole-life insurance policy and made sure to pay all the premiums. They may be subject to inheritance tax nevertheless, but when the same person wrote the policy in trust, you will not have to pay IHT and undergo through the long probate process.
Only when the tax and debts are paid that you can distribute the remainder of the estate to the beneficiaries, including yourself if you are one.
What Happens When You Can’t Pay Inheritance Tax?
While you can take a traditional bank loan, there is also the option of a private inheritance tax loan, which is most beneficial especially when you are an executor who is not a beneficiary and don’t have the money to patch up paying for IHT before the probate. Without funds to pay IHT, the estate will be locked and held up for the beneficiaries who want to make use of their inheritance as soon as possible.
You might want to consider getting an inheritance tax loan as it requires little paperwork and can give the funds you need right away. Since it is not the same as a traditional bank loan, they don’t do credit checks and will not require you to own a home. There are no monthly repayments too as the loan is repaid from the estate proceeds.
There is no need for a will, the lender directly settles IHT payments to HMRC, and the property will not be charged too. After the loan is granted, you can then apply for Grant of Probate in which the estate assets will allowed to be disposed of for the profits to be used to pay the loan.
When you’re stuck with IHT obligations, work with a tax professional, such as Legend Financial. We know all the ins and out of this business and have served a lot of clients in the same situation on a daily basis. Trust your IHT affairs to us!