Inheritance Tax

An article recently appeared in the financial press about how estates were getting hammered with Inheritance Tax penalties for failure to pay the tax within six months of the death of the deceased.

The reason the story is of interest is that the non-payment of tax was the fault of the Probate Registry NOT the executor, yet it is the executor who pays the penalty. The reason is as follows:

When someone dies, unless they owned all their assets jointly with someone else or unless they have very small amounts of savings, their estate needs to obtain a grant of probate, which is effectively permission to distribute the estate.

The Probate Registry (the department which issues the grants) is often taking more than 9 months to issue the grant, yet the HMRC want the Inheritance Tax within six months. This can be very problematic as the assets often need to be sold to pay the tax but cannot be sold because the grant of probate is taking so long to be issued.

Also, the HMRC will prevent a grant being issued before the Inheritance tax is paid, so funds have to be found elsewhere, though in practice the deceased's bank can pay the tax directly to the HMRC, assuming there is sufficient in the account.

With property, the tax can be paid over 10 years but only the first payment has to be made to allow the grant to be issued. Paying over 10 years is a lot more expensive but in practice, once the house is sold, the balance can then be paid off.

Inheritance Tax is never paid on transfers to a spouse, so most of the problems occur on second death or the death of single people and unmarried couples.

One solution is to take out a joint-life, second death, whole-of-life policy which will pay out a sum sufficient to pay the tax on second death. The payment will be in trust so it is outside the estate (if it were inside the state it would exacerbate the problem). The money would be paid out on receipt of a death certificate and claim form, solving the cashflow issue in one fell swoop. If Inheritance tax was no longer an issue, the money would still be available to the beneficiaries. This could be a welcome legacy to your children, especially if much of your estate had been diminished due to care fees, for example.

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