Catch-22 eased on probate applications

The catch-22 situation can occur if you do not have sufficient ‘liquid’ assets that can pay out directly to HMRC to cover the first payment of Inheritance Tax.  The personal representatives (known as executors where there is a Will), can apply for probate on credit from HMRC to postpone all or some of the Inheritance Tax due.

To obtain this credit, the personal representatives would have to show the efforts made to raise funds to pay the Inheritance Tax due and this used to include trying to obtain a loan.  Obtaining loans for Inheritance Tax has become more difficult over the years and whether a financial institution will lend you funds, can depend on the assets in the estate.

Good news

The good news is that this problem has now been eased.  In this year’s Spring Budget, the Chancellor announced that, from 1 April 2024, personal representatives will no longer need to have sought commercial loans to pay Inheritance Tax before applying to obtain a ‘grant on credit’ from HMRC.

Paying Inheritance Tax

Inheritance Tax attributed to some assets can be paid by ten annual instalments, i.e. houses and unlisted shares.  For assets in which the instalment option is available, you pay the first instalment by the end of the sixth month after the person died.  Therefore, if someone died in April, the first instalment of Inheritance Tax would need to be paid by 31 October.

If you choose to pay the Inheritance Tax by instalments on a particular asset, once that asset is sold, any outstanding Inheritance Tax attributed to that assets must be paid in full.

For assets where the Inheritance Tax cannot be paid by instalments, i.e. bank accounts and portfolio holdings, all the Inheritance Tax needs to be paid by the same date as the first instalment mentioned above.

After this date, i.e. 1 November, interest is charged on all outstanding Inheritance Tax, including the Inheritance Tax which is being paid by instalments.

The problem

Paying the Inheritance Tax before obtaining probate can be problematic as you need probate before you can sell the main assets, i.e. houses, in order to raise the funds to pay the Inheritance Tax.

Usually, the Inheritance Tax can be paid directly to HMRC from bank accounts or portfolio holdings.  A catch-22 arises if there are insufficient funds in these ‘liquid’ assets to cover the first payment of Inheritance Tax.  In this situation, you need to sell/cash in assets to pay the Inheritance Tax due but for the ‘non-liquid’ assets, probate is needed in order to sell them.

Loans to pay Inheritance Tax can be hard to source and expensive.  The relaxing of the rules should make the process easier for personal representatives.

Further advice

If you require advice on Estate Administration, Probate, Trusts, Wills, Estate Planning and/or Tax, please do get in touch with our team of experts.