The issue of inheritance tax can be a significant concern for all of us, not only when planning our own estates, but also for those who are left behind to deal with the estate of a loved one (executors). Quite often inherited assets are tied up in property, investments or other non-cash assets which can make finding the funds to pay inheritance tax seem overwhelming.
Inheritance tax is payable in the UK on certain assets. Whether or not it is payable will depend on a number of factors. For example, the standard inheritance tax exemption for estates in the UK is £325,000. This means that tax on the value of assets over £325,000 is payable at 40%. There are additional tax-free exemptions that can be claimed on deceased estates depending on the circumstances of the person who has passed away and inheritance tax is not paid on any assets which are being inherited by a spouse or civil partner.
Despite the challenges of acting as an executor and paying inheritance tax, there are options available that you should consider:
Can the inheritance tax be reduced?
- The most important matter to be addressed when looking at a potentially taxable estate, is to ensure that all available tax-free exemptions and allowances have been utilised. Quite often some exemptions and allowances can be missed, and inheritance tax is paid in estate where this can be avoided.
- Derivation – it is possible how to vary how an estate is distributed to reduce the amount of inheritance tax payable. In some circumstances, it is practical to include charitable donations to reduce the amount of the taxable estate.
- Is the valuation of the estate correct – is important to engage with professional valuers to confirm the accuracy of valuations from all assets. Any assets that are overvalued could result in unnecessary tax being paid.
- Has the instalment optioned been considered- only inheritance tax on cash assets needs to be paid immediately. Inheritance tax payable on property can be paid by way of 10 annual instalments.
Can you borrow against the estate?
Another consideration is to borrow against the estate. There are financial institutions who will offer short term executors’ loans which are specifically designed to cover an inheritance tax liability. This is sometimes suitable in estates where there are no cash assets and inheritance tax is payable on a property, as there may be a delay in selling the property, or the executors may wish to retain the property and for it not to be sold. To avoid ongoing interest, an executor’s loan may be a more suitable approach.
Arrange a mortgage
In some circumstances, it may be suitable to take out a mortgage or equity release to provide the funds needed to pay inheritance tax.
Selling assets
A common approach to paying inheritance tax is to sell assets to raise the funds. If there are no suitable bank accounts or savings, assets such as shares, arts or collectibles can be sold to raise sufficient funds. In addition, property or land in the estate can be sold to pay inheritance tax, however the instalment option is no longer available if the property has been sold, and any inheritance tax will need to be paid in full immediately.
Life insurance
It is possible to take out a life insurance policy during your lifetime, which can be written into a trust to cover the inheritance tax liability upon your death. This can ensure that the beneficiaries will receive the estate without the burden of finding funds to pay the tax.
It can be daunting and complex for executors and families to navigate inheritance tax. Quite often, interest can be accruing whilst family members are trying to find the best way to raise funds, which causes a higher amount of stress in what is already a difficult time. By seeking professional advice, you can manage the situation effectively and gain an understanding of the rules, to include exploring flexible payment options and most importantly, you can be certain that the estate has been calculated correctly, and that any inheritance tax liability is mitigated as much as possible. The most effective way, however, is to ensure that you carry out estate planning during your lifetime as this is quite often the easiest way to reduce any potential inheritance tax burden and ensure that your estate passes to your loved ones with ease.
If you would like to discuss inheritance tax or estate planning, please call us on 01279 295047, or complete our enquiry form and we will be in touch.