Many UK residents face the prospect of selling inherited property to settle inheritance tax bills.
The good news? You have options.
This guide walks you through practical ways to pay inheritance tax while keeping your inherited property.
In the UK, inheritance tax can significantly impact estates, especially when most of the value is in property. With the average UK house price around £290,000 and the standard inheritance tax threshold at £325,000, it’s clear why many beneficiaries seek alternatives to selling.
Understanding Inheritance Tax
Let’s start by understanding the basics of inheritance tax in the UK.
Inheritance tax (IHT) applies to the estate (property, money, and possessions) of someone who’s died.
The standard inheritance tax threshold is £325,000. Anything above this is taxed at 40%.
For example, if you inherit an estate worth £500,000, the inheritance tax would be: (£500,000 – £325,000) x 40% = £70,000
There’s an additional allowance called the residence nil-rate band, which can increase the threshold to £500,000 if you’re inheriting your parents’ or grandparents’ main residence.
You need to be on top of the tax payment arrangements.
HM Revenue and Customs (HMRC) expects payment within six months of the person’s death. Missing this deadline can result in interest charges.
In many cases, the IHT bill needs to be paid before Probate has been granted. The property can only be sold once Probate has been received…
Read more: gov.uk/inheritance-tax
Now, let’s explore your options for paying inheritance tax without selling your inherited property.
Option 1: Using Cash Reserves or Investments
There are no rules on how or where you get the IHT money from. So it could come from you, a friend or family member, or it could be borrowed.
Liquidating Non-Property Assets
Using available cash or selling non-property investments would allow you to pay the inheritance tax bill while retaining the inherited property.
Consider:
- Cash savings: The simplest solution, if you have sufficient funds.
- Stocks and shares: Selling investments can provide necessary funds, but consider potential capital gains tax implications.
When deciding which assets to use, factor in current market conditions, potential returns, and tax implications.
Borrowing from Family Members
Borrowing from family to pay the inheritance tax bill can be quicker and more flexible than traditional lending, but requires careful handling to avoid disputes.
If considering this option:
- Formalise the agreement: Create a written loan agreement specifying terms, including amount, repayment schedule, and any interest.
- Clarify repayment plans: Discuss how you’ll repay, perhaps through future rental income from the inherited property or eventual sale proceeds.
- Consider tax implications: If a family member gifts you money and dies within seven years, it might be subject to inheritance tax. Structuring the transaction as a loan can help avoid this issue.
Open, honest conversations and written agreements can prevent misunderstandings.
Option 2: Specialised Lending Solutions
Probate Loans
Probate loans help executors and beneficiaries access funds during the probate process, useful for paying inheritance tax.
These loans are secured against the inherited estate, not your personal assets.
Key points:
- Quick access: Often arranged within 7-10 days, helping meet HMRC’s six-month deadline.
- Flexibility: Borrow from £100,000 to several million pounds.
- No personal liability: Repaid from the estate once probate is complete.
- Loan amounts: Up to 60-70% of the expected inheritance value.
- Costs: Interest rates are higher, often around 2% per month. Monthly repayments are not required.
Consider probate loans if you expect the property value to increase, potentially offsetting the loan costs.
explore probate loansBridging Loans for Inheritance Tax
Bridging loans offer quick access to funds for paying inheritance tax. These short-term loans can buy time until you arrange longer-term finance or sell assets on your terms.
Key aspects:
- Speed: Often arranged within a few weeks.
- Flexibility: Borrow from £50,000 to several million pounds, depending on property value.
- Short-term: Typical terms range from a few months to two years.
- Costs: Higher interest rates than standard mortgages, plus potential arrangement fees. Interest can often be ‘rolled up’ and paid at the end.
- Security: Secured against an executors property, with repossession risk if you can’t repay.
Bridging loans can be effective if you need time to arrange a favourable property sale or explore long-term financing.
explore bridging loansNote: Without the grant of probate, the executor doesn’t have the legal right to sell, transfer, or encumber the estate’s assets, including using them as collateral for a loan.
Option 3: Insurance-Based Solutions
(This involves a bit of forward planning!)
Whole of Life Insurance Policies
Planning ahead with whole of life insurance policies can help manage potential inheritance tax liabilities.
How it works:
- Policy setup: Designed to pay out a lump sum on death, covering the inheritance tax bill.
- Trust arrangement: Placing the policy in trust ensures the payout doesn’t form part of your estate, avoiding additional inheritance tax.
- Ongoing costs: Regular premiums maintain the cover.
- Flexibility: Some policies allow cover adjustments as circumstances change.
This option requires guidance and forward planning but can provide peace of mind, ensuring your beneficiaries can inherit your property without financial stress.
Option 4: Equity Release
Lifetime Mortgages and Home Reversion Plans
Equity release allows homeowners aged 55 or over to access some of their property’s value while still living there, potentially raising funds to pay inheritance tax on other inherited assets.
Two main types:
- Lifetime mortgages: Borrow a percentage of your property’s value. Interest is added to the loan, repaid when you die or move into long-term care.
- Home reversion plans: Sell a portion of your property to a provider for a lump sum or regular payments. Live in the property rent-free until you die or move into care.
Consider the long-term implications:
- Reduces your estate’s value
- Interest on lifetime mortgages can compound quickly
- May affect entitlement to means-tested benefits
Equity release plans are long-term arrangements. While they are an option for you, a bridging loan or second charge loan could be more beneficial and flexible. Always seek advice from a qualified equity release adviser to understand if this suits your circumstances.
Option 5: Deferred Payment Schemes
HMRC offers an option to pay inheritance tax in instalments over ten years for the portion of tax due on property.
This eases the immediate financial burden, giving you time to raise funds without rushing to sell.
Key points:
- Eligibility: Available for inheritance tax due on property and certain business assets.
- Payment schedule: Ten annual instalments, first due six months after the person died.
- Interest: HMRC charges interest on the outstanding amount.
- Early repayment: Pay off the balance anytime if circumstances change.
Apply using form IHT400 when submitting estate details to HMRC. While this spreads the cost, you’ll pay more overall due to interest charges.
Choosing the Right Option for Your Situation
Selecting the best approach depends on various factors:
- Property value and tax bill size
- Your personal financial situation
- Long-term plans for the inherited property
- Wider context of the estate and other beneficiaries
Consider:
- Do you have sufficient liquid assets or investments?
- Can family members help?
- How quickly must you pay the tax bill?
- What are the long-term implications of each option?
Combining strategies often works well. For example, use available cash for part of the bill and a bridging loan or executor loan for the remainder.
Given the complexity and sums involved, seek professional advice. A financial adviser or tax specialist can help you choose the most suitable approach for your circumstances.
In summary
Paying inheritance tax without selling property is achievable with careful planning and consideration of your options. From using cash reserves to exploring specialised lending solutions or planning ahead with life insurance, you have several strategies available.
Early planning can make a significant difference. If you anticipate an inheritance tax bill, start exploring options now to make strategic decisions and potentially reduce the tax burden.
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.