Xentum | A Guide to IHT

A Guide to IHT

March 12, 2024 - 4 minutes read

Posted by Claire Parker

There was a lot of talk recently about whether the Conservative government would use the March Spring Budget to make significant changes to or even abolish Inheritance Tax.

However, whilst they instead focused on other areas, such as a 2% cut to the main National Insurance rate for employees and freezes to alcohol and fuel duty, there was a small but important change made to the IHT landscape which snuck in under the radar.

At the moment, Personal Representatives (PRs) of a person’s estate, which includes either an executor named in a Will, or an administrator if there is no Will, need to pay the inheritance tax due on an estate before being able to obtain a grant of representation.

And the PRs have the problem of not being able to access some or all of the estate’s assets to pay the tax due until they have obtained the grant of representation, so can sometimes be stuck in a position of being unable to pay all of the IHT due.

There are some ways of obtaining access to assets prior to a grant of representation (known as a grant of probate if a Will was in place or a grant of letters of administration if not):

  • Firstly, banks and building societies that participate in the Direct Payment Scheme (DPS) will release funds from the deceased’s account direct to HMRC.
  • If the deceased’s bank or building society don’t participate in the DPS, they still may have their own procedures for releasing money.
  • PRs should contact their bank or building society to see whether they will do this and what their requirements are.
  • NS&I products can be used.
  • Cash funds held in a share or investment portfolio can also sometimes be released by investment providers direct to HMRC, as well as by insurance and investment bond providers.

If all of these routes are exhausted and the full IHT payment has not been completed, the PRs have been expected to raise funds through short term commercial loans, using their own assets or those of the estate as security.

Only in exceptional circumstances were PRs able to obtain a grant of credit, which allowed them to obtain a grant of representation without the full payment of tax. The exceptional circumstances covered are:

  • When it is impossible for the Personal Representative (PR) to fund the full amount due from any source.
  • When it is not in the interests of the Exchequer for the issue of a grant to be delayed.
  • When the PR has made all appropriate enquiries and made all the necessary arrangements to fund the tax due on delivery of the form IHT400. The PR becomes aware of an additional asset or information that suggests a different valuation for an asset already included at the last minute.

Specialist lenders offer probate loans which are short term bridging loans, which have arrangement fees and charge interest. The lender pays HMRC directly and then receives payment from the estate once it’s ready to be distributed, with the interest and arrangement fees added on top.

Tower Street Finance, a large player in this market, estimates that there is roughly £2bn in locked estates each year.

But these loans don’t come cheap. Typical arrangement fees are 2% of the loan, with interest ranging from 20-30% APR, alongside stipulations such as the estate having to be professionally administered to the point of the assets being distributed.

If a grant of representation is issued quickly, interest rates can be minimised, but PRs are now having to deal with significant delays in the Probate Service’s turnaround times, which most acknowledge is down to regional offices closing down during the pandemic and not re-opening. From the latest statistics from the July to September 2023 period, the time from submission to a grant of probate has doubled from 7 weeks in the corresponding period in 2022 to 14 weeks, with longer times for grants for estates without a Will.

In addition, a portion of grant applications are stopped for various reasons, including if there’s a dispute about who can apply for a grant or issues with a Will, as well as errors identified in the submission which require further information.

These cases can take on average 23 weeks, incurring further interest costs for those who have taken out a bridging loan, a financial cost that hits hard on top of the emotional and psychological distress for families not being able to fully move on from the passing of a loved one.

However, in changes announced in the budget, from 1 April those settling estates liable for IHT will ‘no longer need to have sought commercial loans’ before applying to obtain a ‘grant on credit’ from HMRC.

Those settling an estate via the probate process but unable to raise the funds needed to pay all the IHT due will be able to obtain a grant on credit from HMRC, which will be welcomed by many future PRs, if not by the providers of IHT bridging loans!

Article by Ed Stubbs,  Chartered Financial Planner. Book a meeting with Ed via Calendly to find out more about our financial planning services or to discuss any aspect of IHT.