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Estate executors face paying inheritance tax bills from own pocket

Written by: Paloma Kubiak
People agreeing to act as executors are warned they may need to foot the inheritance tax bill out of their own pockets due to delays sorting out finances of an estate.

Under current rules, the executor of a will gains the legal right to administer someone’s estate after death by obtaining probate. See’s Should I take on the role of executor of a will? for more information.

This process includes valuing the estate, paying any debts or taxes and then sharing out the remainder of the estate in accordance with the deceased’s wishes.

However, when it comes to large estates, the process can be long and complex and Royal London is today calling for the rules to be changed so that HM Revenue & Customs (HMRC) allows more time to pay inheritance tax (IHT) bills where a complex estate is being wound up.

IHT must be paid by the end of the sixth month after death, yet the complexity of the process and the assets contained within many estates means assets are unlikely to be sold in time to meet this bill.

Royal London added that property price growth has made IHT a growing problem for executors. Figures from HMRC show approximately 19,000 estates were liable for IHT in 2013/14, but the number is set to rise to about 30,000 estates in 2016/17.

Simple estates, such as those with no property or shares included, can be wrapped up in as little as three to six months. However, the majority of estates take anywhere between six and 12 months to complete as properties or shares may need to be sold and potential creditors need to be found.

As such, disposing of these assets can be a time consuming and complex business for executors. This can often be made worse by problems such as lost paperwork and inaccurate record keeping. If the estate’s assets are unable to be sold by the time the IHT bill comes in then executors must find other ways of paying the bill, often footing it themselves.

Insurance policies written in trust (therefore outside the estate) can be used to release money to meet such bills and there is also the ability to spread IHT payments over 10 years if related to a property.

However, many executors will still find themselves either having to get a short-term bank loan to cover the debt, or else pay it from their own funds, though the money can be reclaimed once the estate is settled.

Helen Morrissey, personal finance specialist at Royal London, said people agree to be executors to ensure the wishes of a friend or family member are honoured after death but they’re unwittingly leaving themselves open to footing what can be a sizeable IHT bill.

“We are seeing more estates than ever subject to IHT and larger estates can take a long time to wind up. Many executors may have no idea that they could be responsible for finding the money for a large tax bill before money in the estate is available.

“While the money can be reclaimed once assets have been sold it is an issue that could cause many executors real financial stress during an already difficult time.  HMRC needs to think again about giving executors who are acting in good faith more time to sort out an estate before they start demanding tax.”

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  • Barry Morse

    Royal London would say that, wouldn’t they? There is an established scheme (the direct payment scheme, to which most banks and building societies subscribe) under which both funeral expenses and IHT liabilities can be paid out of the estate’s assets before probate is obtained. It obviously helps if the deceased has left enough cash to make this feasible!

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