How to pay your inheritance tax bill before obtaining probate

As the executor of someone’s estate whose value is above the ‘nil rate band’ (currently set at £325,000 in 2021) you may need to pay inheritance tax on the deceased assets (if the estate is not covered by other reliefs or exemptions).

Unfortunately, HMRC only allow 6 months from the date of death for this payment to be made without charging interest. In many cases this will mean that you have to pay the inheritance tax without sufficient cash in the bank and before you can sell any property. So, what are your options?

In this article, we look at what you can do to pay your inheritance tax bill before you obtain the grant of probate.

Firstly, what is inheritance tax?

Inheritance tax is a tax on the value of the estate of someone who has died. It’s a tax bill of up to 40% on anything above your threshold. This threshold amount available will depend on a number of factors, including the amount of gifts the deceased made in the last seven years, whether they have relatives and/or a spouse or civil partner at the date of death, and how they leave their estate to their beneficiaries in their will.

Due to the nil rate band, you will not have to pay inheritance tax if the value of the estate is below £325,000 and no gifts outside of the exemptions were made in the last seven years, or, if everything above the £325,000 threshold is left to a spouse, civil partner, charity or amateur sports club.

However, if the deceased’s home is left to the deceased’s children (including adopted, step or foster) or grandchildren, the threshold can increase to £500,000, by the addition of the residence nil rate band (although this is tapered if the estate value exceeds £2 million).

If the deceased was predeceased by a spouse or civil partner, their nil rate band and residence nil rate bands may also be available to transfer. This could take the deceased’s total tax free estate up to £1 million.

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What is probate?

In simple terms, obtaining the grant of probate means obtaining the legal authority to deal with the property, money and possessions of the deceased after they have passed. As an executor, you will have to apply for probate before you can sell any properties.

You can apply for probate through a trained solicitor, accountant licenced to undertake probate work, or you can fill out the probate forms yourself by going to the .gov website.

How to pay for the inheritance tax before selling the estate

As mentioned previously, the biggest challenge is, you cannot apply for probate until you have paid the inheritance tax. Plus, you only have a six-month timeframe to pay the tax from when the death occurred. If you cannot pay the tax within six months, HMRC will charge interest and late payment penalties.

As a legal personal representative who is dealing with the estate, HMRC may expect you to borrow money or use your own assets to settle the tax bill before applying for probate.

In this situation, there are a few options available to you:

1. Access deceased funds 

Under some circumstances, you may be able to access the deceased assets, such as their bank accounts (given you have permission to access the bank account and have the death certificate). You can then pay the inheritance tax bill via any money kept in bank accounts or building societies. Under the Direct Payment Scheme, banks or building societies can usually pay the inheritance tax directly from the deceased’s account, even if this has been frozen. The Direct Payment Scheme also applies if the deceased has any funds or investments in stocks.

2. Pay in instalments

There is an option to pay for the tax in instalments in relation to assets which cannot easily be converted into cash, i.e. land, business interests and certain holdings or shares. You can pay the instalments annually for over ten years. HMRC will charge interest on the instalments, but hopefully the property would be sold prior to a second instalment. The tax must be paid in full once the asset has been sold.

3. Executor’s Loan

Executors are not liable to pay inheritance tax from their own assets (although they can do if they wish and then claim the funds back from the estate once probate has been granted). If the other options aren’t suitable, an executor’s loan might be your best option. Executor loans are available from most banks at their standard loan rate. An executor’s loan is essentially a bridging loan that allows you to pay the inheritance tax bill and obtain the grant of probate.

Where to get help

Applying for probate or dealing with inheritance tax can be a daunting task, so often it is recommended to approach a credible probate service provider who can deal with the full administration process.

It is also advised that people draw up a will at the earliest opportunity and approach professional estate planning advisors in advance to reduce inheritance tax liabilities and protect your assets that will be distributed to loved ones in the future.

HWB Accountant’s specialist team can review your estate to provide an estimate of your current inheritance tax exposure and suggest options available to you to mitigate this. We can also provide advice regarding the use of pensions and trusts, and recommendations on adjustments that could be made to your current will to make this more tax efficient. We provide a full service offering, so if the individual has already passed and you require assistance with the probate process, we are also able to help with this, completing as much or as little of the estate administration as you require.