How do I pay inheritance tax?

Dealing with the loss of a loved one is an understandably upsetting time, but if you’re also the one who has been assigned as the deceased’s personal representative (either as the executor or administrator), then it can add even more stress to the situation. We shed some light on how to reach the probate process by getting over one of the biggest hurdles that you’ll need to cross first – the inheritance tax bill.

What is inheritance tax?

Inheritance tax is a tax charged on a deceased’s estate. An estate is the term used to encompass all of the deceased’s personal belongings including cash, properties, and non-tangible assets such as shares. So, when someone passes away, their wealth that they leave behind may be subject to inheritance tax.

Inheritance tax has long since been one of the most controversial and unpopular forms of taxation in the UK. Critics argue that the individual would have been paying the relevant taxes throughout their lifetime on earnings and gains, so to be taxed again upon death would mean unfair double taxation. Others, however, support inheritance tax and see it as a mechanism to redistribute wealth amongst the whole of society as opposed to allowing it to be kept within historically affluent families.

Who has to pay inheritance tax?

Inheritance tax is generally paid from the deceased’s estate; however, this is commonly misunderstood. Many beneficiaries (those who are entitled to receive benefits or assets from the deceased’s estate) mistakenly believe that they must pay the tax liability. The confusion can arise where the beneficiaries expect to receive more from their inheritance but have not factored in, or realised, that any tax due must be paid first and therefore could reduce the overall amount they receive in the end.

Another reason why many believe that it is close family members who often become responsible for paying the tax is due to the somewhat cumbersome administrative process of obtaining probating. Probate is the legal term which describes permission for an authorised person to administer and distribute assets from the estate which usually falls onto a trusted relative. They are either classed as an executor (someone who has been named in the deceased’s will) or an administrator (someone who has been assigned by the courts where no executor has been named).

However, before probate can be granted, any inheritance tax liability must be settled first. Herein lies the cause of the issue – the personal representative must somehow find a way to pay the tax before they’ll have access to any funds from the estate. We’ll go on to explain what options are available in order to do this in the section below.

When are the inheritance tax return deadlines?

You need to be aware of two inheritance tax deadlines. The first is when inheritance tax must be paid by, and this is due at the end of the 6^th month from the day of death. For example, if the deceased died 4^th April 2024, then any inheritance tax due must be paid by 31^st October 2024. If the deadline is missed, HMRC will start applying interest at a rate of 7.25%on top of the tax owed.

The second deadline is the submission of the inheritance tax return form. An inheritance tax return must be submitted, even where no tax is due. The tax return must be submitted within 12 months of the date of death. If the inheritance tax return form is submitted late, then HMRC will issue an initial penalty of £100. If it is late by between 6 – 12 months, then a further £100 penalty will be issued. However, if the amount of tax due is less than the penalty, then the maximum that will have to be paid is just the tax due. This means that where no tax is due, the penalty fee (if paid) will be refunded. Penalties can be paid/recouped from the deceased’s estate.

How to make an inheritance tax payment

Personal representatives will need to first ascertain whether any inheritance tax is due from the estate. You can use our article on “how much inheritance tax will I need to pay?” as a guide on how to calculate this. Where a tax liability arises from the deceased’s estate, you will need to complete form IHT400. If the deceased’s estate is small and no tax is due (referred to as an excepted estate), then you can fill in form IHT205 instead which is a simplified version. Remember to do this by 12 months from the date of death to avoid the penalties.

To make payment, be aware that you will need to first obtain a payment reference number from HMRC. You can apply for one online and you’re advised to do so at least 3 weeks before you attempt to make payment. Depending on the situation, there are several options on how to pay inheritance tax:

If cash funds are available:

1. If the deceased has sufficient funds in their own accounts to clear their estate’s tax liability, then you can ask their bank, building society, or investment provider to pay HMRC directly through the ‘direct payment scheme’. This is the most straightforward option but may not always be available. Whilst most banks are happy to do so, it should be noted that not all will have this arrangement in place. What’s more, this is only available where the deceased has sufficient funds to do so which may not always be the case.
2. Alternatively, where you have sufficient funds, you may choose to settle the tax bill from your own personal accounts in order to obtain probate as quickly as possible. Once you have access to the deceased’s estate, you can then repay yourself.

If cash funds are unavailable:

1.  You can personally take out a bank loan in order to pay the inheritance tax due and obtain probate as quickly as possible. Like above, you would then be entitled to repay yourself (and any interest you had to pay on the loan) from the deceased’s estate. Although relatively straightforward, interest rates can be high so you should carefully consider how quickly you’ll be able to gain cash funds from the estate in order to repay the loan.
2. Enter into a payment instalment plan with HMRC.  This can be useful where you have an estate that predominantly holds valuable assets which may not be easy to liquidate into cash, such as property or land. HMRC will allow for instalments to be paid equally across up to 10 years and will require the first instalment to be made by the inheritance tax payment deadline. Interest however will be charged on the outstanding amount, as well as any outstanding instalments which are consequently paid late. To use this payment option, you will be able to indicate this preference on the IHT400 form.

What happens after inheritance tax has been paid?

Once HMRC have received both the inheritance tax return and any payment due in full, they’ll be able to issue a probate summary (referred to as IHT421) within 10 working days. This will allow you to request Grant of Representation from the Probate Registry to gain access to the deceased’s estate. Be aware that there is a £300 fee to apply for probate where the value of the estate is £5,000 or more (there is no fee if the estate’s value is under £5,000). This fee can be reclaimed from the estate.

Get help with your inheritance tax return

We understand if you need extra support during this difficult time. Completing the inheritance tax return is hugely complex and no doubt an arduous task, but we can ensure that it is submitted to HMRC in time to help you avoid the potential fines. Get in touch with us to discuss your needs and how we can help.