When is inheritance tax paid? |
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Digby Bew explains when inheritance tax is paid
Of the many challenges posed by Inheritance Tax (IHT), one the most common, practical, issues can be in funding the required payments within the relevant statutory time periods. Section 226, Inheritance Tax Act 1984 sets out the ‘due date’ for payment of the tax:
i. In the case of lifetime transfers, tax is due six months after the end of the month in which the chargeable transfer is made unless made after 5th April and before 1st October in any year when tax is due on 30th April in the following year.
ii. Similarly, in the case of the tax arising on a transfer on death, IHT is due six months after the end of the month in which the death occurs but personal representatives must pay the tax for which they are liable on delivery of any IHT Return that they are required to make to HM Revenue & Customs, even if before that due date.
iii. Where tax, or additional tax, is due at death because a potentially exempt transfer proves to be a chargeable transfer or the transferor dies within seven years of making a chargeable lifetime transfer, again that tax is due six months after the end of
the month in which the death occurs.
Although simply stated, the practical difficulty is often one of funding a substantial lump sum of tax at a point
when, for one reason or another, funds are not readily available.
Take for example Jack and his wife, Jill, whose circumstances were the subject of my note last month on ‘Property and Probate’. If Jack has left his estate by Will, not to Jill absolutely, but rather to a discretionary trust of which Jill is perhaps but one of several potential beneficiaries, ‘Dunfallin’ itself standing in Jack’s sole name, then it is going to be necessary to apply for a grant of probate to Jack’s Will. The executors of the Will must not only deliver a Return of the estate to HMRC for IHT purposes within twelve months from the end of the month in which the death occurs , but they must also pay the IHT calculated as due within the time limits set out in section 226 (above) before they can obtain the grant of probate, producing Form IHT421, duly stamped by HMRC, as part of the grant application papers filed with the Probate Registry . And yet access to the realisable value of assets in Jack’s sole name will only be available to the executors upon their producing a grant of probate so as to be able to make title to the asset.
Solving this administrative ‘Catch 22’ is not necessarily straightforward. It might be possible to complete an Appointment over the estate’s residue from the Will’s Trust in favour of Jill prior to the application for the grant of probate such that the Will is then read as if Jill had been the original residuary beneficiary with spouse relief available and with the result that no IHT is, in fact, payable. This will depend upon available powers under the terms of the Will; in any event it might be wished to retain the testamentary trust in full for ‘asset protection’ purposes in the future, or it might be that spouse relief is of no assistance if Jack and Jill are unmarried cohabitees, a dilemma faced by the Burden sisters in 2007.
Although the personal representatives’ access to assets is legally restricted pending issue of their grant, agreement was reached several years ago following discussions with the British Bankers’ Association and the Building Societies’ Association that personal representatives can draw funds held at the deceased’s bank or building society account solely for the purposes of paying IHT prior to issue of the grant; Form IHT423 is used for these purposes.
Additionally, section 227, Inheritance Tax Act 1984 provides for an election to be made to pay the IHT due on the value of certain assets by ten equal yearly instalments, rather than one lump sum, with the first instalment being due on the date on which the whole tax would otherwise be due if it were not payable by instalments. Most commonly, the property eligible for this instalment option includes land or buildings of any description wherever situated as well as unquoted shares or securities (subject to certain exceptions) and the net value of a business. Perhaps unsurprisingly, interest on the unpaid portion of tax payable by instalments is added to each instalment; equally, having originally elected for the instalment option, the tax outstanding (with interest at the time of payment) may be paid at any time.
It might therefore be that, by using a combination of pre-grant access to bank and building society accounts and use of the instalment option, Jack’s executors are able to pay the first tranche of IHT enabling them to obtain the grant of probate to Jack’s Will. Were they subsequently to sell an asset on which the instalment option has been claimed then the related tax still outstanding in respect of that value with accrued interest becomes payable forthwith.
Should these steps not enable sufficient funding to be obtained, then consideration could be given to seeking a short term loan pending issue of the grant of probate and an opportunity to realise assets then to repay the loan. On occasion, other family members or estate beneficiaries might be persuaded to provide the necessary funds; otherwise recourse can be had, at a price, to commercial lenders.
A further possible option is set out at para 05071 of HMRC’s Inheritance Tax Manual, entitled ‘Obtaining a grant on credit’: ‘Under IHTA 1984, s226(2) personal representatives (PRs) are required to pay all the tax for which they are liable on delivery of an account before they can obtain a grant. However, in very exceptional circumstances they may obtain a grant before paying tax if they can demonstrate that it is impossible to raise the money before obtaining the grant.
Any request for a grant on credit (a request to postpone payment of tax other than on instalment option property until after the grant) will be dealt with by Primary Compliance Technical Support (PCTS). PCTS will make sure that any necessary steps (such as land charges) are taken to protect HMRC’s claim. They will ask for written undertakings to pay the tax within a specified period before allowing the garnt. When the form IHT421 is issued PCTS will mark the file cover to show that a grant on credit has been obtained. The file will be processed in the normal way, but PCTS will keep details of the case in a separate sub-file. They will monitor the case and make sure that the undertakings are met within the specified period. When the tax that was due on delivery of the account has been paid they will make sure that any land charges are lifted.’
Jack may also have been advised of the potential IHT exposure of his estate in the event of his death and obtained insurance cover on his life to provide a lump sum to meet the liability. In these circumstances, he will undoubtedly have written the policy benefits in trust. This will ensure that not only will the policy proceeds not be included in the value of his estate otherwise chargeable to IHT but will also provide a ready pool of funds available immediately through the Trust and without having to await issue of the grant of probate to Jack’s executors. However, the executors should review the arrangements made for payment of the premium(s) in respect of that cover as it may be that the premium payments comprise potentially exempt transfers for IHT purposes which, subject to possible exemption through the £3,000 annual IHT gifting allowance or a claim that the premium payments comprise normal expenditure from surplus income, would then need to be brought into account for the purposes of calculation of the IHT liability on Jack’s death if made less
than seven years before his death.
Having solved the immediate problem, it is important that, having elected for the instalment option where available, Jack’s executors should not lose sight of the ongoing liability to pay instalments of IHT in the future; as they remain primarily, and personally, liable for outstanding IHT they must ensure that proper arrangements are put in place to secure payment of future instalments with interest before they complete the winding up of the estate, taking a charge over, or retaining, estate assets, if necessary, to protect themselves against the liability to pay the outstanding tax.
‘Cash flow’ issues are not confined to the IHT arising on the chargeable transfer deemed to be made on an individual’s death but can arise on lifetime transfers of value particularly when considering the lifetime gifting of non-cash assets. If the donor is to pay the IHT on a lifetime gift, the loss to his estate, which quantifies the amount to be brought into charge for IHT purposes, is not just the gift, it is the gift plus the tax on the gift; in other words, the value of the gift must be grossed up when the donor is going to pay the tax, but there is no grossing up if the tax is paid by any other person. It follows therefore that if the IHT is not paid by the donor, the transfer itself attracts less IHT. Not only that, but if the tax is paid by the donor, then it must be paid in one lump sum; the instalment option for qualifying asset
types is only available where the tax is borne by the person benefiting from the transfer.
Thus, in the case of qualifying non-cash assets, such as land, the argument would be to make the gift subject to the donee bearing the tax; not only does this result in a smaller IHT liability but, if the asset is income-producing, this could provide a flow of cash from which to pay, or contribute towards, the instalments. Alternatively, the donor could fund the instalments payable by the donee by additional gifting but taking advantage of available IHT exemptions (as above).
June 2012
Disclaimer
Of the many challenges posed by Inheritance Tax (IHT), one the most common, practical, issues can be in funding the required payments within the relevant statutory time periods. Section 226, Inheritance Tax Act 1984 sets out the ‘due date’ for payment of the tax:
i. In the case of lifetime transfers, tax is due six months after the end of the month in which the chargeable transfer is made unless made after 5th April and before 1st October in any year when tax is due on 30th April in the following year.
ii. Similarly, in the case of the tax arising on a transfer on death, IHT is due six months after the end of the month in which the death occurs but personal representatives must pay the tax for which they are liable on delivery of any IHT Return that they are required to make to HM Revenue & Customs, even if before that due date.
iii. Where tax, or additional tax, is due at death because a potentially exempt transfer proves to be a chargeable transfer or the transferor dies within seven years of making a chargeable lifetime transfer, again that tax is due six months after the end of
the month in which the death occurs.
Although simply stated, the practical difficulty is often one of funding a substantial lump sum of tax at a point
when, for one reason or another, funds are not readily available.
Take for example Jack and his wife, Jill, whose circumstances were the subject of my note last month on ‘Property and Probate’. If Jack has left his estate by Will, not to Jill absolutely, but rather to a discretionary trust of which Jill is perhaps but one of several potential beneficiaries, ‘Dunfallin’ itself standing in Jack’s sole name, then it is going to be necessary to apply for a grant of probate to Jack’s Will. The executors of the Will must not only deliver a Return of the estate to HMRC for IHT purposes within twelve months from the end of the month in which the death occurs , but they must also pay the IHT calculated as due within the time limits set out in section 226 (above) before they can obtain the grant of probate, producing Form IHT421, duly stamped by HMRC, as part of the grant application papers filed with the Probate Registry . And yet access to the realisable value of assets in Jack’s sole name will only be available to the executors upon their producing a grant of probate so as to be able to make title to the asset.
Solving this administrative ‘Catch 22’ is not necessarily straightforward. It might be possible to complete an Appointment over the estate’s residue from the Will’s Trust in favour of Jill prior to the application for the grant of probate such that the Will is then read as if Jill had been the original residuary beneficiary with spouse relief available and with the result that no IHT is, in fact, payable. This will depend upon available powers under the terms of the Will; in any event it might be wished to retain the testamentary trust in full for ‘asset protection’ purposes in the future, or it might be that spouse relief is of no assistance if Jack and Jill are unmarried cohabitees, a dilemma faced by the Burden sisters in 2007.
Although the personal representatives’ access to assets is legally restricted pending issue of their grant, agreement was reached several years ago following discussions with the British Bankers’ Association and the Building Societies’ Association that personal representatives can draw funds held at the deceased’s bank or building society account solely for the purposes of paying IHT prior to issue of the grant; Form IHT423 is used for these purposes.
Additionally, section 227, Inheritance Tax Act 1984 provides for an election to be made to pay the IHT due on the value of certain assets by ten equal yearly instalments, rather than one lump sum, with the first instalment being due on the date on which the whole tax would otherwise be due if it were not payable by instalments. Most commonly, the property eligible for this instalment option includes land or buildings of any description wherever situated as well as unquoted shares or securities (subject to certain exceptions) and the net value of a business. Perhaps unsurprisingly, interest on the unpaid portion of tax payable by instalments is added to each instalment; equally, having originally elected for the instalment option, the tax outstanding (with interest at the time of payment) may be paid at any time.
It might therefore be that, by using a combination of pre-grant access to bank and building society accounts and use of the instalment option, Jack’s executors are able to pay the first tranche of IHT enabling them to obtain the grant of probate to Jack’s Will. Were they subsequently to sell an asset on which the instalment option has been claimed then the related tax still outstanding in respect of that value with accrued interest becomes payable forthwith.
Should these steps not enable sufficient funding to be obtained, then consideration could be given to seeking a short term loan pending issue of the grant of probate and an opportunity to realise assets then to repay the loan. On occasion, other family members or estate beneficiaries might be persuaded to provide the necessary funds; otherwise recourse can be had, at a price, to commercial lenders.
A further possible option is set out at para 05071 of HMRC’s Inheritance Tax Manual, entitled ‘Obtaining a grant on credit’: ‘Under IHTA 1984, s226(2) personal representatives (PRs) are required to pay all the tax for which they are liable on delivery of an account before they can obtain a grant. However, in very exceptional circumstances they may obtain a grant before paying tax if they can demonstrate that it is impossible to raise the money before obtaining the grant.
Any request for a grant on credit (a request to postpone payment of tax other than on instalment option property until after the grant) will be dealt with by Primary Compliance Technical Support (PCTS). PCTS will make sure that any necessary steps (such as land charges) are taken to protect HMRC’s claim. They will ask for written undertakings to pay the tax within a specified period before allowing the garnt. When the form IHT421 is issued PCTS will mark the file cover to show that a grant on credit has been obtained. The file will be processed in the normal way, but PCTS will keep details of the case in a separate sub-file. They will monitor the case and make sure that the undertakings are met within the specified period. When the tax that was due on delivery of the account has been paid they will make sure that any land charges are lifted.’
Jack may also have been advised of the potential IHT exposure of his estate in the event of his death and obtained insurance cover on his life to provide a lump sum to meet the liability. In these circumstances, he will undoubtedly have written the policy benefits in trust. This will ensure that not only will the policy proceeds not be included in the value of his estate otherwise chargeable to IHT but will also provide a ready pool of funds available immediately through the Trust and without having to await issue of the grant of probate to Jack’s executors. However, the executors should review the arrangements made for payment of the premium(s) in respect of that cover as it may be that the premium payments comprise potentially exempt transfers for IHT purposes which, subject to possible exemption through the £3,000 annual IHT gifting allowance or a claim that the premium payments comprise normal expenditure from surplus income, would then need to be brought into account for the purposes of calculation of the IHT liability on Jack’s death if made less
than seven years before his death.
Having solved the immediate problem, it is important that, having elected for the instalment option where available, Jack’s executors should not lose sight of the ongoing liability to pay instalments of IHT in the future; as they remain primarily, and personally, liable for outstanding IHT they must ensure that proper arrangements are put in place to secure payment of future instalments with interest before they complete the winding up of the estate, taking a charge over, or retaining, estate assets, if necessary, to protect themselves against the liability to pay the outstanding tax.
‘Cash flow’ issues are not confined to the IHT arising on the chargeable transfer deemed to be made on an individual’s death but can arise on lifetime transfers of value particularly when considering the lifetime gifting of non-cash assets. If the donor is to pay the IHT on a lifetime gift, the loss to his estate, which quantifies the amount to be brought into charge for IHT purposes, is not just the gift, it is the gift plus the tax on the gift; in other words, the value of the gift must be grossed up when the donor is going to pay the tax, but there is no grossing up if the tax is paid by any other person. It follows therefore that if the IHT is not paid by the donor, the transfer itself attracts less IHT. Not only that, but if the tax is paid by the donor, then it must be paid in one lump sum; the instalment option for qualifying asset
types is only available where the tax is borne by the person benefiting from the transfer.
Thus, in the case of qualifying non-cash assets, such as land, the argument would be to make the gift subject to the donee bearing the tax; not only does this result in a smaller IHT liability but, if the asset is income-producing, this could provide a flow of cash from which to pay, or contribute towards, the instalments. Alternatively, the donor could fund the instalments payable by the donee by additional gifting but taking advantage of available IHT exemptions (as above).
June 2012
Disclaimer