How can inheritance tax be paid if there is no cash available in the estate?

Personal representatives are liable for the inheritance tax payable on assets passing under a deceased’s will or under the rules of intestacy. This can be a daunting responsibility for someone to take on, especially if there is no cash available in the deceased’s estate.  

When someone dies, inheritance tax (IHT) becomes payable if the value of their estate is greater than the available tax free thresholds. The tax usually has to be paid by the end of the sixth month after the date of death where the grant of representation (which is the document the personal representatives (PRs) will need to deal with the deceased’s assets) will not be issued before the IHT has been paid.

IHT on a property and certain business assets can be paid in ten yearly instalments or until the asset is sold, whichever comes first. However, interest will still start to accrue on any outstanding IHT six months after the date of death.

Most banks will release cash from a deceased’s bank account to pay the IHT but what happens if an estate is asset rich but cash poor and there is not enough cash in the deceased’s bank accounts to pay the IHT?

The PRs may be able to use their own money to pay the IHT, which can then be paid back once the assets have been sold. Alternatively, some of the residuary beneficiaries of the Will may be able to pay the IHT and then be repaid when funds are distributed to them from the estate. 

The PRs may need to take out a short-term loan to pay the tax and there are specialist companies who offer this type of lending. This type of lending can be expensive. 

In certain circumstances PRs can ask HMRC to postpone payment of IHT until after they have the grant. This is known as a grant on credit. The PRs should write to HMRC requesting a grant of credit and explaining the steps which have been taken to try and raise the money to pay the tax.  

HMRC recently relaxed the requirements and no longer ask the PRs to seek a commercial loan before requesting a grant on credit. If HMRC agree to issuing a grant on credit, they will ask the PRs to give certain undertakings before giving the Probate Registry approval to issue the grant. The IHT must then be paid as soon as possible, for example on completion of the sale of a property.   

How Moore Barlow can help

If you are dealing with somebody’s estate and are worried about how the IHT will be paid, our lawyers in the Private Wealth team can guide you through the process and discuss which options set out above are most appropriate in your circumstances.