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Rayner my parade! The importance of specialist advice.
Jemma Brimblecombe
Inheritance Tax (“IHT”) has been a devisive subject for a long time. Now interest rate chaos has added to the burden many face when trying to settle IHT on a deceased’s estate.
A combination of previous house price increases, soaring inflation and tax free threshold of £325,000 which has been frozen since 2009 has resulted in more and more families and estates finding themselves subject to IHT. With reduced and frozen income tax thresholds, diminishing capital gains tax allowances, and mortgage rates soaring, the tax burden for most individuals seems to be increasing, all in the background of a cost of living crisis. Alongside this, the increase in interest rates also impacts on the IHT which is due on an estate.
The IHT haul for 2022/23 was £7.1 billion. Currently, IHT is 40% on the value of someone's estate above a £325,000 threshold. This can rise to £500,000 if the individual leaves their home to a child or grandchild and their estate is less than £2 million. Therefore, married couples with children (and a property) can have a combined £1 million tax free before IHT is charged. Couples without children only get a combined £650,000.
IHT is payable by the estate before an application for a Grant of Probate can be made; the Grant being the legal document which allows the estate’s assets to be sold or transferred. In most situations, IHT on property can be paid over a 10-year period after death in yearly instalments or paid in total when the property is sold. This means often a large percentage of the IHT owing on a typical estate is not often paid until the property is sold.
However, obtaining the Grant and selling a property can take a long time for many estates. The executors cannot sell a property until they have the Grant and even when they have it, the property market is slowing down and the entire sale process can take months. The Grant can take several months due to delays at HMRC and the Probate Registry. It is not uncommon that a Grant is not received until nine months after death even if the executors act efficiently.
During this time, the IHT remains outstanding and the interest begins to accrue six months after the end of the month of date of death. Currently, the interest charge on outstanding IHT is 7%. For context, the interest rate at this time last year was half that, at only 3.5%.
These delays are in part caused by HMRC and the Probate Registry and with the slowing property market the IHT buden is only going to get worse.
During lifetime, IHT liability can be reduced through gifting, drafting wills in a way that maximises exemptions and a number of lesser-known tactics that can be equally effective. With proper planning, individuals have the option of minimising and mitigating against IHT much more than other taxes.
Therefore, unless the rates are lowered by HMRC or they give estates a longer grace period before interest is payable, estate have a heavy burden. There are a number of steps which can be taken to minimise the amount paid.
- Do not delay getting a Probate application made. Estimated figures may be allowed if assets are taking too long to be valued provided that a corrective account is provided to HMRC to confirm the values.
- If a property is going to be sold, start taking actions to achieve this as quickly as possible; get the estate agents appointed, prepare the legal paperwork, consider exchanging conditional on receipt of the Grant.
- If possible, overpay IHT using other assets before the property is sold to stop interest kicking in. It might even be worth considering a loan from beneficiaries or other family members simple to pay down the tax liability. Even some third party lenders have stopped lending to estates in the current financial climate.
We can advise and assist on all aspects of Estate Administration and are alive to the significant cost of delays.
Further information
If you have any questions regarding this blog, please contact Diva Shah in our Private Client team.
About the author
Diva Shah is an Associate in the Private Client team. She acts for various clients including high net worth individuals, entrepreneurs, executors, trustees and individuals who lack mental capacity on a broad range of matters.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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