Q&A: Can you clear a £100,000 inheritance tax bill without selling up?
Q: My parents’ house was left to my brother and I, but due to the size of the estate we were liable to pay a hefty tax bill of over £100,000. We are unfortunately not able to pay a bill of this size through our savings and we’d ideally like to keep the house and rent it out, so we would rather not sell if we don’t have to. Could we instead take out a mortgage to pay the bill, or pay it in instalments in some way, perhaps through any rental income we make?
A: You don’t make it clear whether or not probate has already been granted and you are already in possession of the property - but if not, you must declare on the IHT400 form if you intend to pay the Inheritance Tax (IHT) bill in installments.
This form is also used to calculate how much IHT is due, but if you intend to pay in installments, the box can be ticked on the form for things that can take a while to sell - such as property or investments, like shares for example. You are then able to spread the payments over equal annual instalments over 10 years.
However, you will need to take any interest into account that will be added to the amount owed until it is cleared. Therefore, if you are considering a mortgage, you’ll need to ask an expert to calculate whether this is the right option for you - as even basic mortgage rates might be a more expensive way of repaying the tax in full.
An important issue is whether you and your brother were in a position to claim to transfer unused nil-rate band. If the parent who died first didn’t make full use of their nil-rate band by leaving everything to your other parent, for example, that would mean the nil-rate band available to set against your parents’ estate would be £650,000 rather than £325,000.
Also, more of the estate would be tax-free if you haven’t yet claimed the residence nil-rate band of £175,000, which is available to children who inherit their parents’ home. As with the normal nil-rate band, this can be doubled if it wasn’t used when the first parent died.
If you think you might be able to claim these additional reliefs, you will need to track down your parents’ marriage certificate and copies of their wills to accompany the inheritance tax claim forms.
If you haven’t already done so, you and your brother should update your will to include the property, plus, you should draft a lasting power of attorney document that would enable the other to take over the running of the property, such as pay the mortgage or the IHT bill, in the event that either of you become incapacitated either mentally or physically.
If you would like some legal advice about estate planning, or drafting an LPA or new will, contact Downs Solicitors to see how we can help.