If you’ve agreed to act as executor to the estate of family or friends, you might face an unexpected tax bill yourself.
Royal London is warning that executors can face paying inheritance tax bills out of their own pockets in cases where sorting out the finances of an estate is delayed.
These sorts of delays are especially common where property is involved.
The warning follows research from Royal London, which looked at the financial issues that arise when someone dies.
The insurer is calling for a rule change so HM Revenue & Customs can give executors more time to settle inheritance tax bills, where a complex estate is being wound up.
Current rules mean the executor of a will gains the legal right to administer someone’s estate when they die. This is done by obtaining what is known as ‘probate’.
Probate involves valuing the estate, paying any debts or taxes that are owed, and then sharing the remainder of the estate value in accordance with the wishes of the person who has died.
However, larger estates are often more complex and can involve a long time to sell assets, including property.
Complex estates take longer
Data from HM Revenue & Customs shows that larger estates are likely to include a range of different assets which may need to be sold. These larger estates are likely to have outstanding mortgages and other debts, which will need to be paid before the process can be completed.
The deadline for paying inheritance tax is the end of the sixth month following death, but the complexity of the process and assets within many estates means assets are unlikely to be sold in time to meet this deadline for paying the tax due.
Royal London highlight that property price growth has made inheritance tax a growing issue for executors.
HM Revenue & Customs figures show that approximately 19,000 estates were liable for inheritance tax in 2013/14, rising to around 30,000 estates in 2016/17.
In the case of simpler estates, where no property or shares are included, probate can be granted in as little as three to six months. Most estates however take between six and 12 months to complete, with property and shares needing to be sold and creditors identified.
Time consuming work
Disposing of assets including property and investment portfolios can become a time consuming and complex business for executors. The complexity is often exacerbated when issues such a lost paperwork and inaccurate record keeping arise.
If the estate’s assets cannot be sold in time, then executors have to find other ways to pay the inheritance tax bill.
One way in which tax bills can be paid is to make funds available through a suitable life insurance policy written in trust.
Such a life assurance plan sits outside the estate and so does not incur inheritance tax on death.
A new life assurance policy would not necessarily need to be taken out, as existing policies can be reviewed reviewed to write them under trust.
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. However, they are unwittingly leaving themselves open to footing what can be a sizeable inheritance tax bill.
“We are seeing more estates than ever subject to inheritance tax 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.”
Here at Informed Choice, we work with individuals and their families to help identify the scale of inheritance tax liabilities and recommend suitable arrangements to mitigate or remove this tax charge for future generations.
Do get in touch to arrange an initial meeting to discuss your own inheritance tax planning. This first meeting is at our expense and with no obligation to buy our services.
You can call me on 01483 274566 or email shelley@icfp.co.uk, to ask any inheritance tax planning questions or arrange a meeting.
