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As an executor, how am I meant to pay inheritance tax?

View profile for Katie Hayden
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As an executor, how am I meant to pay inheritance tax?

As Benjamin Franklin once said, ‘in this world, nothing can be said to be certain, except death and taxes.’ Generally speaking, inheritance tax (IHT) is payable on the estate of someone who has died, and this is often a big concern for Personal Representatives faced with the administration of an estate.

The good news, you ask? Not every estate has to pay inheritance tax. IHT is charged at a rate of 40% on every estate above the £325,000 threshold. However, there are additional allowances that can be claimed depending on the deceased’s personal circumstances. 

If the deceased was married and passed their entire estate to their surviving spouse, upon that spouse’s death, you can transfer any unused Nil Rate Band (NRB) allowance. This means that the threshold is potentially doubled to £650,000 on the second death. Whilst the surviving spouse is still alive, everything passes between spouses tax free. There is also the Residence Nil Rate Band Allowance (RNRB), and if there is a property that passes to direct lineal descendants, this further allowance can be claimed.

But what happens if, despite applying these allowances, there is still inheritance tax to pay? IHT becomes payable within 6 months of the end month in which the death occurs. If there is tax due, the Personal Representatives must work out how they are going to pay the tax. If the tax is not paid on time, you run the risk of being hit with interest and penalties. 

Here’s the problem; the Probate Registry will not issue the Grant of Probate until the tax has been paid. Without the Grant of Probate, the assets cannot be released in order to pay the tax. 

What options are available to pay inheritance tax? 

If cash is not readily available, the Personal Representatives need to look to find funds from elsewhere. There are a few possibilities available such as; 

  • taking out a loan
  • paying the tax in instalments
  • borrowing funds from a beneficiary or, in some scenarios, 
  • preparing a Deed of Variation to vary the terms under the will to pass assets to IHT exempt beneficiaries to reduce the tax due.

If you would like further advice as to your duties and responsibilities as a Personal Representative, please get in touch with our Wills, Trusts and Probate Team. 

I can be contacted on 01245 453837 or katie.hayden@birkettlong.co.uk.

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