This week in the news: inheritance tax interest costs rising due to Probate delays

This week the Daily Telegraph published an article reporting that bereaved families are having to pay hundred of pounds a week in extra inheritance tax due to severe delays at the Probate Registry.  According to recent data, 20% of applications now take more than six months to be processed. 

When a person dies, and inheritance tax is due on their estate, their executors must make a first payment on account within six months of the end of the month of death; eg if someone dies on 1 January, payment is due by 31 July.

The Probate Registry will not grant Probate until it has received confirmation from HMRC that this first payment has been received.  The problem is that the executors require a Grant of Probate to deal with most of the assets of the estate.  So how do they raise the money?

There are a number of solutions to alleviate this problem:

• Inheritance tax on some classes of assets – typically more illiquid ones such as property/land and family shareholdings/businesses – can be paid in 10 annual instalments, the first of which is payable at the six month deadline. This is very helpful because typically most of the inheritance tax liability is attributable to the family home.  Effectively, the instalment option means that only 10% of the inheritance tax due on the family home is payable before Probate.
• There are various schemes whereby financial institutions will release monies / assets directly to HMRC prior to Probate being obtained.  This is called the “Direct Payment Scheme”.  Most major banks and the NS&I participate in this scheme.  A similar scheme also applies to Government gilts.
• The executors can take out commercial borrowing in order to meet the first inheritance tax charge.  Interest will be charged on this, although relief is available on the first 12 months of interest through offsetting against the estate’s income.  Some beneficiaries may also be willing to lend at no, or preferable rates of, interest.
• If the deceased had a life assurance policy held in trust, it should be possible to realise these funds without a Grant of Probate.
• In extremis, HMRC will allow a Grant on credit, but only where it is impossible to raise the funds and the executors can demonstrate that they have made every practical effort to raise the money.

Given the above solutions, why are Probate delays costing estates money?  Well, in almost all cases the instalment option is subject to interest.  For example, if executors elect to pay inheritance tax on the family home by instalments, HMRC will apply interest to the balance outstanding after six months.  At the time of writing (March 2023) the applicable rate of interest is a hefty 6.5%.  Executors will therefore want to obtain Probate as soon as possible so that they are able to deal with assets – eg sell the family home, liquidate investments – and pay off the remaining inheritance tax liability, thereby stopping interest from running. 

Likewise, if executors have used commercial borrowing, they are likely to want to pay it off as soon as possible.  This is particularly the case given that interest relief is only available on the first 12 months of interest and is not available to subsequent loans (eg to meet further inheritance tax instalments).

Finally, legacies paid more than 12 months after the date of death (the “executors’ year”) normally carry interest.   The applicable rate of interest is currently 3%.  Executors will therefore want to pay legacies sooner rather than later.

The Probate Registry has radically amended its systems in recent years, becoming increasing digital. The Ministry of Justice has pledged to hire more staff and to upskill existing staff in order to ease waiting times.  With interest rates at a recent all-time high, a swift Probate process will be welcomed by executors and residuary beneficiaries alike.