Becoming the executor of a family member’s estate is laudable – but it could land you with a sizeable inheritance tax bill.
Estate executors could end up having to pay inheritance tax (IHT) bills out of their own pockets due to HM Revenue & Customs time limits on paying what’s due.
The warning follows research from Royal London, which looked at the financial issues that arise when someone dies. The insurer found some executors are caught in a catch-22 situation: tax needs to be paid; but the money from the estate isn’t available to pay the tax until the tax is paid and the assets have been released. Royal London is calling for HMRC to allow people more time to pay IHT bills where more complex estates are being wound up.
Under current rules, the executor of a will gains the legal right to administer someone’s estate after death by obtaining probate. The probate process includes valuing the estate, paying any debts or taxes, and then sharing out the remainder of the estate in accordance with the deceased’s wishes.
Six months to pay
But HMRC rules state IHT must be paid by the end of the sixth month after death, with interest charged on the amount owed if it isn’t paid when it’s due. Simple estates can be wrapped up in three to six months, but more complicated estates take between six and 12 months to complete, as assets may need to be sold and potential creditors located.
Disposing of these assets can be a time-consuming and complex process. This can often be exacerbated by issues such as lost paperwork and inaccurate record-keeping. If the estate’s assets cannot be sold by the time the IHT bill comes in, then executors must pay the bill themselves and reclaim the cash later.
Helen Morrissey, personal finance specialist at Royal London, says: ‘People agree to be executors to ensure the wishes of a friend or family member are honoured after death. However, they are unwittingly leaving themselves open to footing what can be a sizeable IHT bill. Many executors may have no idea that they could be responsible for finding the money for a large tax bill before money in the estate is available.’
IHT is usually paid on estates worth more than £325,000 (the nil-band rate). There is no IHT to pay on gifts left to a spouse, civil partner or charity. If the deceased had a spouse or civil partner who died before them, their IHT threshold could be worth up to £650,000 (twice the current threshold). A new ‘family home allowance’ is currently being phased in (see page 52), which means that by 2020 the nil-band rate will increase to £500,000 for individuals passing on a property to children or grandchildren. The new allowance will allow a couple to pass on £1 million estates tax-free.
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Property price growth has made inheritance tax a growing issue for executors. Figures from HMRC show approximately 19,000 estates were liable for inheritance tax in 2013/14, but the number is set to rise to around 30,000 estates in 2016/2017.
HMRC offers ‘instalment options’ on some assets, including houses and land, allowing the tax due to be paid in instalments over 10 years (plus interest). Executors can arrange this by filling in the appropriate section on IHT form IHT400. The full amount of IHT becomes immediately payable if the asset is sold.
Nicola Waldman, solicitor at law firm Hodge Jones & Allen, says: ‘Although it’s rare, executors may have to pay IHT out of their own funds before the estate is sorted out. This may happen where there are no cash assets in the estate that can be used prior to probate, and there is noninstalment option property in the estate, for example listed shares or personal effects (on which IHT must be paid before probate can be granted), or six months or more has expired since the date of death and it is a taxable estate.
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