Acting as the Executor of an estate comes with a myriad of responsibilities, including valuing the deceased’s assets and arranging distributions to beneficiaries. An Executor is also responsible for ensuring that any Inheritance Tax due on the estate is paid to HM Revenue and Customs (HMRC).
If an estate has an Inheritance Tax liability then this must be paid within six months of the person’s death. Any payments made after this six month time period are subject to interest and penalties.
Interest rate for Inheritance Tax
The interest rate for Inheritance Tax changes regularly along with the market rates of interest. Since January 2022, the rate of interest payable on late payments for Inheritance Tax has been steadily increasing. The most recent increase took effect on 5 July 2022, raising the interest rate to 3.75%.
Following this increase, the interest rate on Inheritance Tax payments is now at its highest rate since 4th November 2008. This increase means that an estate with a tax liability of £100,000 that did not pay until a year after the six month period had lapsed could be faced with an additional tax liability of £3,821, not taking into account any further interest rate changes.
Unfortunately, Executors may often find that they do not have access to any liquid assets from the Deceased’s estate to meet the tax payment within the six month deadline. This is particularly common where the Deceased held a large portfolio of properties but few cash or other liquid assets.
In other circumstances there may be significant cash holdings that can’t be accessed until after the Grant of Probate has been obtained. This can cause even more difficulties as HMRC will require payment of tax prior to assenting to the Grant being released by the Probate Registry. This can make it difficult to release the necessary funds to pay the tax in the first place.
Mitigating the risk of interest rates
To mitigate the risk of interest rates accruing on the tax liability, there are various steps that an Executor may take, including:
• Requesting a payment directly from the Deceased’s bank to HMRC to cover the tax in full or in part;
• Paying the Inheritance Tax by way of a personal loan by the Executor to the estate;
• Arranging financing from a bank or other financial provider to cover the Inheritance Tax payment.
An Executor may also make Inheritance Tax payments by instalments over ten years in respect of certain assets, including property, land and business assets. However, interest will continue to accrue on any part of the tax that remains unpaid by the instalments. Often an initial payment can be made by instalments to satisfy HMRC to obtain the Grant of Probate, then the remaining balance can be cleared once estate assets have been released or sold.
Next Steps
Acting in an estate where there is a liability for inheritance tax can be complex. You should always consider obtaining professional advice to ensure that you are taking the correct steps in administering the estate.
If you are dealing with a taxable estate and you have any questions, or if you require assistance with any other probate matter, please do not hesitate to contact our Trusts & Estates Department, Heather Lally or Stephen Mackellar on 01244 354800 or
email: Heather.Lally@dtmlegal.com or Stephen.Mackellar@dtmlegal.com.
This article is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.
