If you have an Estate that is liable to Inheritance Tax (IHT) and there is insufficient cash or liquidity to pay the IHT before a Grant of Probate has been finalised, what happens next?
As Inheritance Tax needs to be paid before obtaining the Grant of Probate, there are three options,
- Families fund this from their own resources,
- Take a loan to pay the IHT or
- Set up a Life Assurance policy during your lifetime (in Trust) that can distribute the proceeds before the need to obtain Probate.
The combination of rising house prices and the freezing of Inheritance tax allowances has resulted in more estates being liable to IHT (acknowledging the recently introduced Main Residence Nil Rate Band), but many of these estates have valuable properties but limited cash or liquid investments.
You would think that any bank or lender would view lending money (short-term) to fund the IHT liability as a very low risk proposition but looking at some of the potential charges and interest rates applicable, this is not the case.
Loan set-up fees of 2% and interest charged at rates in excess of 6% per annum are not untypical and leave beneficiaries feeling like they are being exploited.
Although some companies do allow withdrawals before the Granting of Probate, the amounts vary considerably e.g. NatWest limits access to £25,000 per account, while Bestinvest, the stockbroker, will not release any money without probate. NS&I has a £5,000 limit on its savings certificates and Premium Bonds, while the Post Office has a £30,000 cap.
So, the option of setting up a Life Assurance policy (in Trust) during your lifetime to potentially fund or partially fund any IHT liability can look very attractive. It provides an instant and non-contentious method of funding this liability and if set up when you are in relatively good health, the regular premiums can be very affordable. There’s always the option of asking beneficiaries to help towards the ongoing cost of the policy). Crucially, provided there is at least one surviving Trustee following your death, the policy can distribute proceeds before the need to obtain Probate.
If you wish to discuss your own situation or have a question about Inheritance Tax planning, please do contact us on 01825 76 33 66 or send us an email.