What happens if you can’t pay Inheritance Tax?

In short, you may face delays or difficulties in applying for probate and distributing assets according to a Will or rules of intestacy.

When someone passes away and you become responsible for administering their estate, you may become liable to pay Inheritance Tax (IHT) on their assets.

This will be due on the total value of the person’s estate if this totals more than £325,000, unless certain exceptions apply which can reduce total taxable assets, including if the deceased person:

• Leaves money to charity in their Will
• Passed on certain business assets
• Leaves assets to their spouse
• Leaves a first or main home to their children or grandchildren
• Gave away assets seven or more years before their death

You’ll need to work out the value of the person’s taxable estate to calculate if IHT is due.

You must do this and pay IHT by the end of the sixth month after the person has died.

How IHT is paid

If IHT is due on an estate, it can be paid in a number of ways, including:

• By you or a relative from your own bank
• Under the Direct Payment Scheme from the person’s bank account
• Using the British Government Stock Scheme
• Through the transfer of national heritage property
• Through a trust
• Via a loan secured against the value of your inheritance

HM Revenue & Customs (HMRC) will expect that you pay IHT before applying for probate, which gives you the legal right to administer a person’s estate and sell or distribute assets.

However, in certain circumstances, you may not be able to do this.

This might be because of:

• Poor liquidity – If the deceased person had a range of assets but little cash, then most of the value of their assets will be tied up and not readily available to pay IHT without being sold, which can’t be done without probate.
• Complex estate valuation – Valuing an estate accurately can be a complex process, especially if it includes unique or hard-to-value assets such as antiques, artwork, or shares in private companies. This complexity can lead to delays in calculating the exact Inheritance Tax due, making it difficult to pay the tax within the six-month window after the deceased’s death.
• Disputes over the Will or estate – Disputes among beneficiaries or challenges to the Will can delay the process of settling the estate, including the payment of Inheritance Tax. Such disputes need resolution before proceeding with probate, and this can significantly delay the process, making it challenging to pay IHT on time.

If this applies to you, or you can’t pay IHT for any other reason, you must take steps to alert HMRC of this fact.

First steps

If you can’t pay IHT due on someone’s estate, then it’s critical that you approach HMRC and explain this as soon as possible.

This is because you may face penalties and high interest on IHT that is unpaid or filed late.

HMRC may recommend that you borrow money against the value of assets that will be sold from the estate. It may also permit you to pay in instalments, particularly for estates that are comprised of non-liquid assets.

If you’re struggling to pay IHT, it’s also important that you stay updated on changes to your obligations and how this may impact your probate application.

Upcoming changes

Following the Chancellor’s 2024 Spring Budget, it is becoming easier to obtain a ‘grant on credit’ for Inheritance Tax.

Under current regulations, Personal Representatives (PRs) of a deceased person are required to pay IHT due on the estate before obtaining probate, to the extent of their ability.

This currently includes taking out commercial loans if needed, to pay the full value of IHT due before applying for probate.

However, in recognition of the issues this could cause for estate executors, the Chancellor has announced that PRs will no longer be required to take this step before applying for a ‘grant of credit’ – meaning probate is granted on the understanding that IHT will be paid later, when assets from the estate have been sold.

For advice on applying for probate and managing Inheritance Tax liabilities, please contact our team today.