Who pays the Inheritance Tax to HMRC?
When someone passes away, the value of their estate may be subject to Inheritance Tax (IHT). But who has to pay that tax to HM Revenue & Customs (HMRC)? The answer depends on whether you are administering the estate or receiving an inheritance. Inheritance Tax can be a complex and sometimes misunderstood aspect of estate administration. In most cases, it is not the beneficiaries who settle this bill, but rather the responsibility lies with those managing the estate.
In this article, we break down the key responsibilities and considerations surrounding the payment of Inheritance Tax.
Responsibility of Executors and Administrators
The primary responsibility for paying Inheritance Tax falls to the Executor (if there is a Will), or the Administrator (if there is no Will). These individuals are legally responsible for managing the deceased's estate, which includes calculating the value of the estate, reporting it to HMRC, and settling any tax liabilities.
Before the estate can be distributed to beneficiaries, the Executor or Administrator (Personal Representative) must ensure that all taxes and debts are paid. This includes submitting the necessary forms, such as the IHT400 or IHT205, depending on the estate’s complexity and value. The tax is generally due within six months of the death, and interest may be charged on overdue payments.
Can beneficiaries be liable?
In general, beneficiaries are not directly liable for Inheritance Tax. However, there are exceptions. If a beneficiary receives an asset before tax has been settled and the estate lacks sufficient funds to cover the IHT bill, HMRC can pursue that beneficiary for a proportionate share of the tax due.
Similarly, if the deceased made gifts within seven years of their death and those gifts exceed the tax-free thresholds, the recipient of the gift may become responsible for part or all of the tax due on that gift. This is known as the “seven-year rule” and applies particularly to Lifetime Gifts.
How funds are raised from the estate
To pay the IHT, Personal Representatives (PRs) typically raise funds from cash assets in the estate, such as bank accounts, investment portfolios, or insurance payouts. These assets can often be accessed before probate is granted, as many banks have policies allowing payment of IHT directly to HMRC from the deceased’s account.
If liquid funds are insufficient, the PR may need to sell estate assets, such as property, shares, or personal possessions. In some cases, loans may be arranged to cover the tax bill temporarily until assets can be realised.
What if there’s not enough liquidity?
If the estate does not have enough readily available funds (liquidity) to cover the IHT, PR can explore several options:
- Instalment payments: HMRC allows IHT on certain assets, such as property, to be paid in instalments over ten years, though interest is charged.
- Bank loans or Executor loans: Short-term loans may be arranged to bridge the gap until probate is granted and assets can be sold.
- Negotiation with HMRC: In exceptional circumstances, HMRC may be open to negotiating payment terms, though this is not guaranteed.
In situations like these, Personal Representatives need to seek specialist probate and estate administration support, as financial and legal risks can arise if tax obligations are not met correctly and promptly.
Final thoughts
When asking “Who pays the Inheritance Tax to HMRC?” The answer is clear: the Executor or Administrator of the estate is legally responsible for ensuring it is paid. While beneficiaries are generally not liable, they can be indirectly affected, particularly if gifts or early distributions are involved. Managing Inheritance Tax can be a challenging process, but with the right guidance, it can be navigated smoothly and compliantly.
Kings Court Trust is here to support you through every step of the estate administration process, ensuring tax obligations are met and the estate is distributed efficiently and fairly.
