Inheritance Tax: The Six-Month Deadline Families Often Overlook

The probate cash-flow problem

The difficulty for executors is often one of timing.

A property can usually be marketed and an offer accepted while probate is being dealt with, but the sale cannot normally complete until the grant of probate has been issued.

At the same time, some inheritance tax may need to be paid before the grant is obtained.

This can leave an executor with an estate that is more than capable of paying its tax bill eventually, but without enough accessible cash to pay it when it falls due.

Paying inheritance tax by instalments

Where inheritance tax relates to certain assets, including qualifying land and property, HMRC allows the tax to be paid in ten annual instalments.

That can help with the immediate cash-flow problem, but it does not mean the whole inheritance tax bill can simply be deferred for ten years.

Tax attributable to assets that do not qualify for the instalment option will generally still need to be paid by the normal deadline, together with the first instalment relating to the qualifying property.

Interest can also be charged on outstanding inheritance tax, so spreading payments may increase the overall cost to the estate.

If the property is subsequently sold, the remaining instalments will generally become payable at that point.

Can inheritance tax be paid from the estate before probate?

Sometimes.

HMRC’s Direct Payment Scheme allows participating banks and building societies to release money from the deceased’s accounts directly to HMRC before probate has been granted. Similar arrangements may be available through some investment providers.

This can be extremely useful where an estate has sufficient cash or investments but the executor cannot otherwise access them.

However, not every provider participates, and these arrangements do not necessarily solve the problem where most of the estate’s value is tied up in property.

Executors should therefore establish early on what assets are available, which providers may be able to release money directly to HMRC and how much of the inheritance tax bill will need to be funded from elsewhere.

What if the estate simply cannot pay?

There is a further route, but it is important to understand that this is intended for exceptional circumstances rather than as a normal way of dealing with inheritance tax.

Where inheritance tax needs to be paid before probate but the executors genuinely cannot raise the money — perhaps because most of the estate is tied up in property and reasonable options for funding the liability have been exhausted — HMRC may consider allowing a grant to be issued on credit.

This can allow the executors to obtain the grant, sell the relevant assets and then settle the outstanding inheritance tax from the proceeds.

But this should be regarded as an exceptional backstop, not something an estate can assume will be available. HMRC will consider the particular circumstances, and executors may need to demonstrate why the tax cannot be paid, what attempts have been made to raise the money and how the outstanding liability will ultimately be settled.

Where an estate may need to rely on this route, it makes sense to engage with HMRC as early as possible rather than wait until the payment deadline has arrived.