Inheritance tax can be a daunting financial burden, and sometimes, you might need a helping hand to manage it. When someone passes away in the UK, HMRC requires that inheritance tax (IHT) be paid at the end of the sixth month following someone’s death. However, what happens if there isn’t enough cash readily available to cover this tax bill? In such cases, the burden often falls on the executors, who may need to use their own funds to pay the tax bill upfront.
The catch is that HMRC will only grant probate, which provides access to the assets of the estate, after they have received the full amount of tax owed. This can create a dilemma for beneficiaries, who might not be able to cover the tax owed without probate. Alternatively, they might be eager to use their inheritance for various purposes, such as paying school fees, making home renovations, or purchasing property.
When it comes to settling an inheritance tax bill, there are two main types of financial solutions available: probate loans and bridging loans. It’s important to note that you can’t use a regular mortgage on an inherited property to raise the necessary funds. The reason you can’t borrow against the property within the estate is simple: you don’t own it yet. The legal ownership of the property has not been transferred to you, so it cannot be used as collateral for a traditional mortgage. Therefore, you must consider other options.
There are two types of loans designed to help you manage inheritance tax:
If you’re the Executor of a Will or the Personal Representative in the absence of a Will, you can apply for a Probate loan, often referred to as an Executor loan. This type of loan is specifically designed to raise funds to pay an inheritance tax bill.
Bridging loans, on the other hand, offer a temporary financing option to bridge the gap during a property purchase. They are typically used for short terms and are repaid after the purchase is complete. Importantly, bridging loans can be used for various purposes beyond home purchases. There are two main types of bridging loans: open and closed.
Bridging loans offer a unique advantage in that you can use another property you already own as security, such as your existing home. This can serve as your bridging loan deposit. Furthermore, the property within the estate can be used as your exit strategy to repay the bridging loan, especially if you intend to sell it.
However, it’s essential to work out your exit strategy in advance and get it approved by the lender, as it needs to be achievable within the typical 12-month maximum term of a regulated bridging loan. If a sale has been agreed, but is yet to complete, you may be able to approach the lender for a short extension.
Lenders typically require confidence that the estate’s affairs are straightforward and that the will won’t face any disputes, and will check your credit rating.
For more information, guidance and support during this challenging time, contact the Coreco Commercial team. We are personal, professional and progressive in supporting you with your inheritance tax and finding the best possible solution for your personal circumstances. Contact us today to discuss inheritance tax loans and let us support you.
The time frame varies, depending on factors such as the application process, assessment, asset valuation, and approval. External factors, like legal document procurement and valuation discrepancies, can also affect the timeline. It’s best to discuss this with your lender for accurate information.
Review the terms and conditions of your loan agreement and contact your lender to inquire about early repayment options.
The loan may require contributions from other beneficiaries. Depending on the arrangement you have with your lender, the distribution of assets equally and swiftly may be impacted.
Interest rates can vary by lender and may include fixed or variable rates, monthly or annual interest, or interest accrual. Consult your lender for specific details.
If your final inheritance falls short of covering the loan, you may need to explore additional options. These could include personal liability (paying it off yourself), negotiation with the lender, asset liquidation, using personal funds, or seeking professional advice to determine the best course of action.
In the UK, inheritance tax is levied at 40% on everything above £325,000, the individual allowance for one person. For married couples, this allowance doubles and is payable after the second spouse’s death. Beneficiaries do not pay IHT on their inheritance, but they may be subject to income tax or capital gains tax in the future.
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