Handling a loved one’s estate involves complex processes, particularly regarding inheritance tax (IHT) and probate.
Executors and beneficiaries often ask whether they must pay inheritance tax before probate. This article will guide you through the process, giving an overview of the link between IHT and probate, tax due dates, and options for those struggling to pay.
The Connection Between Inheritance Tax and Probate
Inheritance tax and probate are closely linked in UK estate administration.
IHT is a state tax on the estate of someone who has died, including property, possessions, and money.
Probate is the legal process of administering the estate, involving asset collection, debt and tax payment, and distribution of remaining assets to beneficiaries.
In England and Wales, executors or administrators must submit inheritance tax forms to HM Revenue and Customs (HMRC) before applying for probate. This requirement often creates confusion about whether the tax itself must be paid before probate is granted.
Many assume that all estate matters are handled after probate, but that’s not always true for inheritance tax.
Inheritance Tax Due Dates
Knowing the timeline for paying inheritance tax is essential for proper estate management.
Generally, inheritance tax must be paid by the end of the sixth month after the person died. For instance, if someone died on 3rd January, the inheritance tax would be due by 31st July.
This six-month deadline often falls before probate is granted.
The probate process typically takes several months, and in complex cases, it can take much longer. Consequently, in many cases, at least some inheritance tax will need to be paid before probate is granted.
While the tax is due within six months, you don’t have to wait that long to pay it. HMRC encourages early payment, as interest starts accumulating on the unpaid amount after the six-month period.
Early planning is vital. Gathering all necessary information and funds in the last few weeks before the deadline could be incredibly stressful.
Exceptions to the Six-Month Rule
While the six-month rule applies in most cases, exceptions exist.
If the estate includes certain assets, such as property or shares in a private company, you may be able to pay in yearly instalments. This can be particularly helpful if the estate is asset-rich but cash-poor.
For example, if the estate includes a valuable property that the beneficiaries don’t want to sell immediately, they might choose to pay the inheritance tax on the property in ten yearly instalments.
However, interest will still be charged on the outstanding amount.
Another exception occurs when additional assets are discovered after the initial estate valuation. In such cases, additional inheritance tax may become due, and HMRC will set a new payment deadline.
If you’re managing an estate, check if any of these exceptions apply to your situation. Could spreading out the payments make the process more manageable for you?
Applying for Probate Before Paying Inheritance Tax
Now, let’s address the main question: can you apply for probate before paying inheritance tax?
The short answer is yes, but with a caveat.
While you don’t need to pay all the inheritance tax before applying for probate, you must submit the relevant inheritance tax forms to HMRC before you can apply. These forms (usually IHT400 or IHT205) provide HMRC with details about the estate’s value and the amount of inheritance tax due.
Once HMRC processes these forms, they’ll send you an inheritance tax reference number. You’ll need this number to apply for probate.
So, while you don’t need to pay the tax in full, you do need to have calculated it and informed HMRC about it.
Options When You Can’t Afford to Pay Inheritance Tax Upfront
If the estate lacks sufficient liquid assets to pay the inheritance tax bill, don’t worry.
Several options are available:
- Payment plans: HMRC may agree to a payment plan if you can show that you’re actively trying to sell assets to pay the tax.
- Probate loans: These are short-term loans designed specifically to cover inheritance tax and other probate expenses.
- Using your own funds: Executors or beneficiaries can choose to pay the inheritance tax from their own funds and be reimbursed from the estate later.
- Selling assets: If necessary, you may need to sell some of the estate’s assets to pay the tax bill.
Probate Loans Explained
Probate loans can be a useful solution for estates facing inheritance tax bills.
These loans are secured against the estate’s assets and are repaid once probate is granted and the assets are released.
For instance, consider an estate valued at £1 million with an inheritance tax bill of £270,000 due in less than six months. If the estate’s main asset is a property that will take time to sell, a probate loan could provide the funds to pay the inheritance tax on time, avoiding interest and penalties from HMRC.
However, probate loans come with their own costs, including interest and arrangement fees. They’re also largely unregulated in the UK, so always seek professional and experienced advice if you’re considering this option.
A probate loan might help you handle the inheritance tax payment more smoothly if you’re facing a significant tax bill and limited liquid assets.
probate loansKey Steps in Dealing with Inheritance Tax and Probate
Handling inheritance tax and probate involves several key steps:
- Value the estate: This includes all assets and debts of the deceased.
- Calculate the inheritance tax: Use the current thresholds and exemptions to determine how much tax is due.
- Complete and submit IHT forms: File the appropriate forms with HMRC.
- Pay the inheritance tax: At least partially, within six months of the death.
- Apply for probate: Use the IHT reference number from HMRC in your application.
- Administer the estate: Collect assets, pay debts and distribute inheritances.
Following these steps ensures you’re meeting all legal requirements and minimising potential complications.
When to Seek Professional Help
While it’s possible to handle probate and inheritance tax yourself, many people find professional help invaluable.
A probate specialist or solicitor can guide you through the process, ensuring all legal requirements are met and potentially saving you time and stress.
Similarly, a financial adviser can help with inheritance tax planning, potentially reducing the tax burden on the estate.
When choosing a professional, consider their qualifications, experience, and fees. Don’t hesitate to ask questions about their process and how they can specifically help your situation.
This article provides general information about probate and estate distribution. It is not legal advice. Every estate is unique, and laws can change. Always consult a qualified legal professional or probate specialist before making decisions about estate administration, tax or inheritance.