Is it fair to limit inheritance tax exemptions to spouses only or should other family members be included? This month, Ben Brown discusses how an unexpected bill can have catastrophic consequences for those you leave behind…
I came across a very sad case in the Sunday Times recently concerning two sisters called Eileen and Norah Gillow.
The pair had lived together in a property they owned jointly for more than 40 years, until Norah’s death. It was situated in London and as a result, her share was worth more than the inheritance tax threshold.
Eileen was the beneficiary of Norah’s half, but as there is no exemption from inheritance tax for siblings, it came at a significant price. This share in their property was Norah’s only real asset and was going to have to be sold to cover the tax bill.
There is growing pressure on the government to look at this issue and offer the same exemptions to siblings that are currently available to spouses and civil partners. However, this would open a can of worms – how far should the relief extend? Should it be available to individuals who live together, such as cohabiting couples?
What are the current inheritance tax rules?
I think most people are familiar with inheritance tax and you may already be aware that it is paid at 40% above a certain threshold, after all allowable exemptions and reliefs have been deducted. However, it is not always clear how and when the Revenue expects the tax to be paid.
When someone dies, their assets and liabilities need to be valued, so any tax can be calculated and agreed with HMRC. It is not possible to obtain a grant of probate without paying some or all of the tax first and this is often a problem, as the document is usually required before executors can access assets held in the estate.
But what if we don’t have enough money to pay the bill?
Many financial organisations allow some flexibility for funds to be released from the deceased’s estate to pay inheritance tax, before the grant of probate is received.
If assets, such as property or shares are involved, the HMRC will allow the tax to be paid in annual instalments over a 10-year period, although interest will be charged until payment is made in full.
When a property is the deceased’s only real asset, problems can arise, particularly if other family members are still in occupation. It is now much more common for children to live with parents into their 30s and 40s and I have dealt with several estates where the family home had to be sold to fund an inheritance tax bill.
Is it possible to borrow money to pay inheritance tax?
In the past, it was much easier to arrange borrowing for this purpose, as banks were happy the liability was covered by the value of a house or other asset. Now, they have tightened up their lending criteria and it is extremely difficult to secure suitable borrowing.
It is, therefore, important to plan ahead and ensure money is available when we die to cover any tax. In many cases, life insurance cover is the best way to do this, so funds can be transferred to your executors. It may also be possible to place the policy into a trust so the proceeds themselves are not subject to inheritance tax.
Your will needs to state clearly where any tax liability is to be paid from, to ensure beneficiaries are not adversely affected.
To find out more about inheritance tax or making a will, why not book a free 30-minute consultation with one of our probate specialists? Telephone (0114) 218 4000, email: firstname.lastname@example.org or complete this form.