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The Practicalities of Paying Inheritance Tax

BY: Paul / 0 COMMENTS / CATEGORIES: Inheritance Tax

The Practicalities of Paying Inheritance Tax

The payment of Inheritance Tax on estates would appear to be a growing problem for Personal Representatives. In 2009/10, just 2.7% of estates were subject to Inheritance Tax, whereas in 2015/16, this had risen to 4.2% of estates.

(Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/730125/Table_12_3.pdf)

Any impact that the introduction of the Residence Nil Rate Band has had on the percentage of estates subject to Inheritance Tax remains to be seen. I look forward to seeing updated statistics from HMRC to assess the same.

With the above in mind, now is a good opportunity to offer a refresher on the practicalities of payment of Inheritance Tax and to explore the options available in different circumstances.

For some Personal Representatives, the payment of Inheritance Tax can be relatively straightforward. If the estate has sufficient cash in it, the Executors can generally arrange payment through the Direct Payment Scheme and by completing form IHT423. There are some financial institutions that do not participate in the Direct Payment Scheme, though most will offer an alternative way of arranging payment out of the accounts held with them in order to facilitate the payment of the tax due. If the estate does not have sufficient cash but the Personal Representatives do, they can also personally arrange payment of the tax due and later seek to recover this from the estate. This is not a luxury afforded to many Personal Representatives however and there is often no guarantee of when they may expect to recover their personal monies. This can be due either to the current Probate Registry delays, or the nature of the estate assets may mean that it takes some time for the assets to be sold.

I find that for the majority of Personal Representatives, the above is not an option and they find themselves in a situation whereby the estate assets require a Grant of Representation in order to sell the same, but the Personal Representatives are required to first pay the Inheritance Tax due in order to obtain the Grant of Representation. They are therefore left with a number of options and I intend to explore the more common options below.

The first point of consideration is whether the estate can pay the Inheritance Tax due in instalments. The tax payable on the value of land, businesses, shares/securities which gave the Deceased control of a company and on certain unquoted shareholdings can be paid in ten annual instalments. This can mean that only a portion of the total tax due is payable prior to obtaining a Grant of Representation. The instalment option ends upon the sale of the asset(s) for which it was utilised, but of course the sale of the asset ought to give the Personal Representatives sufficient funds to pay the remaining tax due in any event. One often overlooked point with regard to the instalment option is that if the Inheritance Tax Account and supporting calculation is submitted more than one month prior to the due date for payment of Inheritance Tax (being the end of the sixth month following the death), then no instalments technically fall due and a Grant of Representation can be obtained simply by paying the tax due on the assets that do not qualify for the instalment option.

In my experience, most of the value in a typical estate is in assets that qualify for the instalment option and the tax payable on the assets that do not qualify forms only a small portion of the total tax bill. With that said, it is not uncommon for Personal Representatives to require a significant amount of time to collate the necessary information required in order to prepare the Inheritance Tax Account. It is therefore not always possible to get an account submitted more than a month prior to the due date.

It should be noted that outstanding tax payable after the due date accrues interest at a rate of 2.5% above the Bank of England Base Rate. It is therefore not a perfect solution, but one that is often unavoidable.

If the Personal Representatives do not have the means to pay the tax payable prior to the issue of a Grant of Representation even with the instalment option factored in, they are left with two main options (there are more complex payment options available in certain circumstances such as the transfer of land or chattels, but I propose only to address the most common examples).

The first option is to consider using some lending facility. Typically this is in the format of a bridging loan to cover the tax due with the estate assets used as security for the same. Once the estate assets are sold, the bridging loan can be repaid.

The second option is to consider applying to HMRC to release the IHT421 form (being the form required to obtain a Grant of Probate in cases where Inheritance Tax is payable) on a grant on credit basis, where they will generally request an undertaking from the Personal Representatives to pay the tax once they are in funds. This is considered by HMRC to be a last resort, where lending options have been exhausted. With that said, I have typically found HMRC to be fairly relaxed on this point and provided that an undertaking is provided by the Personal Representatives and they can clearly see that all cash assets have been used to make payments on account of the tax due, I have yet to see such an application be refused.

Ultimately, the Personal Representatives would have to weigh up the interest and any other monies payable on any lending arrangement against the interest and any other monies payable to HMRC for late payment of the tax due. Time will however also be a factor, in that I would typically find that most lending facilities can be arranged much quicker than it can take for HMRC to respond to a request for a grant on credit.

In summary, it is clear that payment of Inheritance Tax is a bigger headache for some Personal Representatives than it is for others. It is unfortunate that the current interest charging regime does not distinguish between cases where payment of interest is an unavoidable consequence of the nature of the estate’s assets and cases with apathetic Personal Representatives who have failed to arrange the payment of the Inheritance Tax due in a timely manner.

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Residential Nil Rate Band

BY: Paul / 0 COMMENTS / CATEGORIES: Will Writing

The residence nil rate band – do I qualify and should I change my Will?

A key promise in the Conservative Party’s manifesto prior to the last election was an increase in a married couples’ “nil rate band” (the amount they can ultimately pass to their children or others free of inheritance tax ) from £650,000 to £1 million. The Party had picked up on a growing disquiet that the nil rate band hadn’t kept up with house price increases which were pushing more and more families into the inheritance tax net. The standard nil rate band has been capped at £325,000 per person until 2021.

On the back of that promise, for deaths on or after 6 April 2017, the new, additional “Residence Nil Rate Band” (RNRB) will be available where the estate contains a family home (“a qualifying residence”) left to children or other “direct descendants” .

A maximum RNRB amount of £100,000 per person is available for deaths this year, increasing to £175,000 in 2020. If you double these figures for a married couple, the magic £1 million figure is reached by 2020.

A “qualifying residence” is any home that an individual lived in before they died (so buy-to-let properties, for example, are not included). If you own more than one residential property when you die, your personal representatives will need to nominate which property the relief should apply to.

At the end of the day, the property needs to end up in the hands of “direct descendants”. They are defined quite broadly in the legislation and include children (including adopted, foster and step-children), grandchildren, together with the spouses and civil partners of children and grandchildren. It does NOT include nieces and nephews, siblings or other relatives.

There are three main ways a property can be “inherited” by direct descendants. These are:

  1. Under the terms of a Will;
  2. Under the intestacy rules; and
  3. By survivorship.

The main perceived difficulty arises when the property is left to a trust, for example a discretionary will trust. In these circumstances, the property will NOT be treated as having being inherited, even if the class of beneficiaries is made up entirely of direct descendants. It should however be possible to appoint the property out of the discretionary trust to direct descendants within two years of death, so that the RNRB can be captured. Where the direct descendant has an absolute entitlement to the property (for example, under a bare trust), the property will be treated as inherited.

For estates with a net value of £2m or more, the RNRB will taper away £1 for every £2 over £2m. Therefore currently, the RNRB will not be available for an individual estate over £2.2m. There may be cases where lifetime gifting is appropriate to ensure the estate is within the limits.

Where the family home has been sold (perhaps to move into a smaller, rented property or a retirement flat or nursing home) “downsizing relief” means that the RNRB can still be claimed. The calculations involved in downsizing relief are complicated, but the essence of the relief is that you can still clam the benefit of the RNRB where you disposed of a qualifying residence on or after 8 July 2015.

Where does this leave us now in terms of estate planning; should we all be changing our Wills to ensure that the RNRB is captured? The short answer is “no”. I have already mentioned that in the case of a discretionary trust, it should be possible to appoint the property out within two years to take advantage of the RNRB. A deed of variation within two years of death, if appropriate, will achieve the same result. In any event, if you have left the property under your Will to individuals who are NOT direct descendants, I doubt those wishes will have changed by reason of the introduction of the RNRB.

Specific provision can be made for the RNRB in the Will, if this gives the testator some peace of mind. One option would be to leave assets equivalent in value to the maximum available residence nil rate band on discretionary trusts, with an accompanying letter of wishes to trustees requesting that they exercise their powers to ensure that any qualifying residential interest is inherited by direct descendants to take advantage of the residence nil rate band.

While a change in inheritance tax reliefs might be a trigger to pull our Will out of the drawer, my guess is that most Wills should prove compliant with requirements for the relief unless, of course, there was never any intention of leaving the estate to children or other “direct descendants” anyway. Only, perhaps, where (rarely) the whole estate is left to a mixture of direct descendants and others, might some redrafting be necessary to ensure that the RNRB will apply to the qualifying part.

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