Inheritance Tax and Probate

JonMitchell

Good afternoon all

My wife's cousin passed away a week ago. She is childless and partner had passed away few years back.

She left 3 properties to my wife, 2 on mortgage and 1 mortgage free. The 2 properties on mortgage were what she used for monthly rental income during her retirement. My wife is hoping she has not inherited a major tax bomb to be paid to HMRC.

. Each of the property is around £480K each valued. So total £1.44million asset

. We understand 40% IHT needs to be paid 6months after deceased date. So around £446K IHT to pay. (Subtracting £325K NRB from £1.44million)

. The 2 rented properties are still self-paying as the tenants are still in there.

Query

. What to do if we are not able to find this lump sum of money to pay off, which is something obviously we do not have immediately or the next 6 months.

. Probate is usually only granted after IHT is paid, which means assets cannot be realised until IHT are paid. What and how do the majority of people handle such situation when they are not able to find enough cash to pay off IHT to HMRC?

Thanks

  

Keep_pedalling

Where an estate is primarily made up of illiquid assets such as property IHT can be paid in instalments, and those instalments can be over 10 years.

it is up to the executors to pay IHT not the beneficiaries.

Keep_pedalling

One other thing your wife might like to consider is a bit of IHT planning herself. This inheritance is going to put your joint estates well into IHT territory, and if you have children she could divert some of this inheritance to your children  I’m a deed of variation, which would avoid that portion ever entering her estate.

JonMitchell

Keep_pedalling said:

Where an estate is primarily made up of illiquid assets such as property IHT can be paid in instalments, and those instalments can be over 10 years.

it is up to the executors to pay IHT not the beneficiaries.

Thanks! 

It happened that my wife's cousin has not got a Will in place and her only next of kin would be my wife, whom is most likely to the executor.

Presuming an annual interests of 2.6% would be charged by HMRC for all unpaid IHT during that 10 year period? 

If paying via instalments over 10yrs, will my wife be able to be granted a probate to be the executor for her cousin to perhaps sell off 1 or 2 of the properties to help pay the IHT?

JonMitchell

Just out of curiosity, what happens if executor is not able to raise enough funds to pay the IHT even on an instalment basis over 10years?

Brie

The funds would be raised by selling the properties.  There's also the issue of dealing with the mortgages as the banks will be wanting their money back too.  so the inheritance isn't as much as you've thought and so the IHT payable may not be as much either.

JonMitchell

Brie said:

The funds would be raised by selling the properties.  There's also the issue of dealing with the mortgages as the banks will be wanting their money back too.  so the inheritance isn't as much as you've thought and so the IHT payable may not be as much either.

I do understand Probate will only be granted, so that assets can be sold, after IHT have been paid to HMRC - not before, am I correct?  

Brie

I'm sure the probate office have dealt with this often where there is no cash just property.  I would expect (happy to be corrected) that they would grant probate and put a lien on one of the properties so the money can be directed to them upon sale. 

But I would def check the mortgage values first as you may be worrying about IHT & probate for no good reason.  If she was using the 2 rentals as income they must be bringing in more than the monthly mortgage payments so that will be cash accumulating in the executor account as well which could be applied to IHT.  But potentially there may be only the house she lived in if the other 2 were maxed on the mortgages.  So best case (massively optimistic?) that's just 480k-325k= 165k to pay IHT on so only a mere £66k instead of 446k.

p00hsticks

JonMitchell said:

Keep_pedalling said:

Where an estate is primarily made up of illiquid assets such as property IHT can be paid in instalments, and those instalments can be over 10 years.

it is up to the executors to pay IHT not the beneficiaries.

Thanks! 

It happened that my wife's cousin has not got a Will in place and her only next of kin would be my wife, whom is most likely to the executor.

Presuming an annual interests of 2.6% would be charged by HMRC for all unpaid IHT during that 10 year period? 

If paying via instalments over 10yrs, will my wife be able to be granted a probate to be the executor for her cousin to perhaps sell off 1 or 2 of the properties to help pay the IHT?

If there's no will in place and your wife is confident that she is the closest living relative then she needs to apply for letters of administration in order to have the authority to sell the properties / collect the rent on behalf of the estate.

In her position with an estate that size, I think I'd be engaging a solicitor, if only to confirm that her understanding of the intestacy rules are correct and that there aren't likely to be any other distant relatives coming in at a later date demanding a share f the inheritance.

JonMitchell

Brie said:

I'm sure the probate office have dealt with this often where there is no cash just property.  I would expect (happy to be corrected) that they would grant probate and put a lien on one of the properties so the money can be directed to them upon sale. 

But I would def check the mortgage values first as you may be worrying about IHT & probate for no good reason.  If she was using the 2 rentals as income they must be bringing in more than the monthly mortgage payments so that will be cash accumulating in the executor account as well which could be applied to IHT.  But potentially there may be only the house she lived in if the other 2 were maxed on the mortgages.  So best case (massively optimistic?) that's just 480k-325k= 165k to pay IHT on so only a mere £66k instead of 446k.

My wife used to be an accountant and she did a quick calculation today. ATM, both rented properties have only 7% LTV each so quite an substantial equity. 

p00hsticks said:

JonMitchell said:

Keep_pedalling said:

Where an estate is primarily made up of illiquid assets such as property IHT can be paid in instalments, and those instalments can be over 10 years.

it is up to the executors to pay IHT not the beneficiaries.

Thanks! 

It happened that my wife's cousin has not got a Will in place and her only next of kin would be my wife, whom is most likely to the executor.

Presuming an annual interests of 2.6% would be charged by HMRC for all unpaid IHT during that 10 year period? 

If paying via instalments over 10yrs, will my wife be able to be granted a probate to be the executor for her cousin to perhaps sell off 1 or 2 of the properties to help pay the IHT?

If there's no will in place and your wife is confident that she is the closest living relative then she needs to apply for letters of administration in order to have the authority to sell the properties / collect the rent on behalf of the estate.

In her position with an estate that size, I think I'd be engaging a solicitor, if only to confirm that her understanding of the intestacy rules are correct and that there aren't likely to be any other distant relatives coming in at a later date demanding a share f the inheritance.

She is thinking of doing the probate herself as there is definitely no other party of interests apart from the lenders of course. But will need to make sure she has enough funds to pay off IHT, even if its installment, before she proceed.

The only thing of getting a solicitor, is the possibility of a big chunk bitten off by the solicitor doing the probate. Solicitor will not raise funds in anyway to help my wife