Funding Inheritance Tax

littlepikelet

My friend's mother's estate will consist mainly of equity, plus a small house and some cash. The estimated tax bill when she dies is considerable, much more than the value of the house. My friend is not sure how much cash is held, either.

She heard something on the radio awhile back about people having difficulty funding Inheritance Tax when it comes due. As far as our researches take us, it seems she can use the cash and any gvt bonds to pay the tax, but can't use the shares to pay tax as can't sell them till the tax is paid. Nor can she pay the tax in installments as it is ordinary stock market equity. Are we right about this?

When the time comes, what are her options? Will she have to borrow money to pay IHT?

John_Pierpoint

The bank will be happy to take the shares or the house or anything else the executor can put up and lend the money and charge interest and fees for doing so.
Stage payments can be made on the portion of the IHT that relates to unsellable assets such a real estate (the small house), if this is really going to be a problem perhaps mum should think about getting more liquidity into her estate.

You are right in that the tax man is the beneficiary who expects to be paid first by the executor and within 6 months or interest will be charged; only then will the paperwork be released that enables the executor to obtain probate from the legal system.

The "Which?" book explains pretty well what is required.

If you can get mum to explain where everything is before her death, that helps a lot.
Do the figures clearly come out at more than £325K (or £650K if her husband left all his estate to her?)

littlepikelet

Thanks for your prompt reply.

The problem is that the mother thinks that she has put aside sufficient cash to pay for the IHT, but is reticent about how much.

Am I right in calculating this as 3/7 of (estate less cash) (the nil rate has been used up on PETs)? There is quite a lot in shares, and I'm thinking the mother may not have considered the IHT on the cash itself in deciding how much to put aside - may not even fully realise the likely tax bill?

John_Pierpoint

Well it is 40% of everything over the nil rate band(s) of 325K or 650K (max) if mum's estate can claim some of a former spouse's nil rate band.
Assuming that PET's (gifts over and above the annual allowances) will mop up the nil rate band, then 40% (4/10) is a little bit less than 3/7ths. [Presumably that 7 is nothing to do with each Potentially Exempt Transfer taking 7 years to become exempt?]

Perhaps the beneficiaries will be prepared to finance the IHT. When I did my Uncle's estate as executor and one of 8 beneficiaries, I was fortunate enough to be able pay the IHT out of my own resources and then reimburse myself three months later.

Tag: Mr Dog.

littlepikelet

No, it's to do with having to have enought cash to pay for the tax on the cash itself, as well as the rest of the estate.

If I am correct.

harryhound

Exactly.
You need to post some figures if this exercise is to be taken further.
EG:

300K House.
12K Contents
2K Car
1K Current account.
50k Savings accounts various
1K Interest earned but not yet paid.
90K Share portfolio various
1K Dividends due but not yet paid.
40K premium bonds & savings certificates.
5K old fashioned life insurance policy.
4K- Funeral expenses various
1K- unpaid household bills various
1K Income tax overpaid refund due for November - April.
498K Estate total value.
199K IHT liability = cash required as no nil rate band still available..
95K Available cash probably: Life insurance plus savings and current account plus Premium bonds and other National Savings.

taxing

littlepikelet wrote: »

No, it's to do with having to have enought cash to pay for the tax on the cash itself, as well as the rest of the estate.

If I am correct.

This mother seems quite 'clued up' (if she is making PETS, and probably using £3000 each year, the £250 gifts, etc etc) so it just could be that she has taken advice has has taken out life insurance to cover the projected IHT liability - with the policy written in trust for the daughter on the understanding that it can fund the IHT on the estate.

The premiums would be regular gifts out of income assuming she (the mother) can afford to live on the money she has left.

The share portfolio may have AIM listed shares qualifing for 100% BPR tax exemption?

And, and as previously asked, is any of the spouses nil rate available (assuming the lady is a widow). That only becomes available on her death (if due).

PETS don't use any of the nil rate unless these are failed PETS, that is made within 7 years of her death - with failed PETS, the donee (the one who got the gift) has to pay the extra tax (reduced in some cases by taper relief which is more the closer to 7 years 'clear' date, it gets).

What does the Will say about the estate anyway; (she may be giving it all to charity...) who are the Executors? It will be their responsibility to raise the cash to pay the IHT - possibly through a short-term loan - there seems to be enough assets to secure against.

In any event, and since 1 April 2003, there has been a procedure that allows cash from the deceased's own (must be in their sole name) account to be paid direct to HMRC - the deceased's bank has to be a participating member of the Direct Payment Scheme. So, the cash can go pay the IHT without needing Probate to release the funds.

P.S. It must be some size of a portfolio, if the IHT on the value of it (which may fall as well as rise, of course), is more than the worth of the house??

Regards

graceangela9

I think you should consult to the expert for this problem.This is a serious issue so you must consult a person who can give you details regarding tax.

SeniorSam

graceangela9 wrote: »

I think you should consult to the expert for this problem.This is a serious issue so you must consult a person who can give you details regarding tax.

Any investment made in a Trust, such as a Loan Trust Bond, can be accessible to the trustees to pay IHT if needed, before Probate. There are lots of elderly people that have Loan trusts for this very reason, including myself, to help my children meet inheritance tax. They also allow me to draw 5% with tax deferred, or no tax payable if a basic rate taxpayer.

Consult an IFA that specialises in this area.

Hope this helps
Sam

littlepikelet

Thanks for all who have replied, most helpful, confirms what I have thought so far.

More info:
The PETs would be currently failed, taper relief starts to become applicable in April. I have not included the tax in the calculation above.

The mother states that she has enough cash to pay the IHT. But by my calculations this means that if no money goes to spouse, she would have to have in cash a sum of money equal to two thirds of the rest of the estate. This seems unlikely.

In fact, she is leaving a quarter of the estate to her spouse. That's how I got the previous figure, that cash would need to be three sevenths of the rest of the estate.

She and her sister are thinking about having to find the tax - possibly using their PETs. The mother won't say how much she has in cash! We are trying between us to suss as much as we can, so that the sisters can tactfully approach their mother, and ask her to get a tax forecast at least.

What would a bank charge to lend for IHT?

littlepikelet

Ooh, just seen your post Sam, it crossed with mine. I will look into this.