How Do You Pay Inheritance Tax If You Have No Money?
How to pay inheritance tax?
Inheritance Tax (IHT) is paid to HM Revenue and Customs (HMRC). Payment is due six months after the person’s death. You can pay by bank transfer, online, or post. For property, installments may be possible. Solicitors handling the estate usually manage these payments within the time limits.
Understanding the Challenge
IHT is due within six months of the end of the month in which the death occurred. If the estate primarily consists of illiquid assets, such as property or business interests, raising the necessary funds can be difficult.
Options for Paying IHT
1. Payment in Instalments
HMRC allows IHT on certain assets, primarily land and buildings, to be paid in 10 equal yearly instalments.Interest is charged on the outstanding balance.This option provides time to sell assets or arrange financing.- This option is not available for all assets, and is mainly for property.
2. Selling Assets
The most common method is to sell assets from the estate.This may involve selling property, shares, or other valuable items.Careful planning is essential to ensure assets are sold at a fair price and within the required timeframe.- If you must sell quickly, you will often not get the best price.
3. Life Insurance
A life insurance policy written in trust can provide funds specifically for paying IHT.The policy pays out on the death of the insured, providing immediate liquidity.This is a proactive estate planning strategy.
4. Borrowing Funds
Borrowing against the estate's assets can provide temporary funds to pay IHT.This may involve taking out a loan secured against property or other assets.Interest rates and repayment terms should be carefully considered.
5. Utilizing Existing Savings
If the deceased had savings accounts or investments, these can be used to pay IHT.Ensure all assets are properly valued and accounted for.
6. Deed of Variation
A deed of variation allows beneficiaries to change the distribution of assets within two years of the death.This can be used to redirect assets to pay IHT or to reduce the overall tax liability.- All beneficiaries affected must agree to this.
7. HMRC Time to Pay Arrangement
In exceptional circumstances, HMRC may agree to a "Time to Pay" arrangement.This allows for a tailored payment plan based on the estate's specific circumstances.HMRC will assess the estate's ability to pay and may require detailed financial information.- This is not guaranteed, and is for exceptional circumstances.
Practical Steps
- Assess the Estate: Determine the total value of the estate and the IHT liability.
- Identify Liquid Assets: Identify any readily available funds, such as bank accounts or savings.
- Value Illiquid Assets: Obtain accurate valuations of property, business interests, and other assets.
- Explore Payment Options: Consider payment in instalments, selling assets, or borrowing funds.
- Contact HMRC: If facing difficulties, contact HMRC to discuss potential payment arrangements.
- Seek Professional Advice: Consult with a solicitor, accountant, or financial advisor for guidance.
- Implement a Plan: Develop and implement a plan to raise the necessary funds and pay IHT.
Key Considerations and Tips
Early Planning
Proactive estate planning can prevent IHT payment problems.Consider life insurance, gifting, and trusts to reduce IHT liability.
Accurate Valuations
Ensure accurate valuations of all assets to determine the correct IHT liability.
Time Management
Act promptly to address IHT liabilities and avoid penalties.
Communication
Maintain open communication with HMRC and beneficiaries.
Professional Advice
Seek expert advice to navigate complex IHT issues.
By understanding the available options and taking appropriate actions, executors can address IHT liabilities even when facing a shortage of funds.