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Can Inheritance Tax be simplified?

The Chancellor has asked the Office of Tax Simplification (OTS) to turn its attention to inheritance tax (IHT), a move which professionals believe is overdue.

In February the OTS published a scoping document and it will gather evidence for a report later in the year.

Among the issues, ripe for examination is the requirement to pay IHT within six months, regardless of whether an Estate has gone through probate and the safeguards on handing over bank balances to claimants. The OTS has not been too specific so far but says it will review “the process around submitting IHT returns and paying any tax” and also “relevant aspects of probate procedure”.

As an executor you can only sell assets from the Estate once you have obtained a grant of probate from the Probate Registry. But it’s a catch 22, as to obtain this you need proof that the IHT has been paid. Even if there are not enough non-property assets in the Estate, you are not personally liable to pay the IHT but it still has to be paid on time. You could get an executor’s loan, although that can be expensive, the bank would need to know the assets and liabilities of the Estate, and you would need to commit to repay the loan as soon as the first proceeds from Estate assets were realised.

Andrea Jones, senior associate and IHT expert at Irwin Mitchell Private Wealth, says: “The process of paying IHT upfront, before an executor has received probate, can create real problems. It can mean getting an expensive loan from a bank, which seems hard when there are assets in the Estate you can’t access.

This becomes all the more difficult if a house or shares later sell below the stated “probate value”, in which case you need to claim “loss relief” to reclaim the overpaid tax.”

The inflexible rule is that IHT must be paid by the end of the sixth month after the person dies – so by July 31 for a death in January. HMRC’s calculator helpfully advises that in 2017, being unable to pay a £1m IHT bill until a further six months had elapsed would have cost the Estate £14,303.

However, where there are non-property assets, it’s useful to note that many cash accounts and managed investment portfolios can be drawn on to pay IHT. Banks, Building Societies and National Savings will normally release cash in accounts to pay IHT direct to HMRC. Fund managers holding investments as nominees will often sell shares and release funds in return for an indemnity from the executors. It is also possible to get HMRC to issue their form IHT 421, needed for the probate application, on “credit” where the Estate only has a property.

IHT on property also can be paid in instalments, over a maximum ten years until it is sold, starting with 10% six months after the month in which the person died. This helps the cashflow problem.

Another concern around any “simplification” of IHT is that banks should not be allowed free rein on releasing a deceased’s liquid assets. At present, surprisingly, there is no requirement for a bank to ensure that balances are passed on only to the legal beneficiaries.

Andrea Jones says: “Simplification must not come at the expense of the right people getting the inheritance to which they are entitled under the deceased person’s Will or (if no Will) the laws of intestacy. Some banks pay out balances on accounts to next of kin, without requiring grants of probate, alarmingly by-passing the proper beneficiaries. Originally just for small balances under £5,000 the practice has expanded. Any revised process must protect family and others meant to benefit.”

Published: 24 April 2018

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April 2018

Key Contact

Andrea Jones