IHT and probate - how it works, problems and risks

Mon 8 January 2024

Where inheritance tax is or may be payable on an estate, matters can get quite confusing and complicated in terms of completing the correct forms and the interaction between the probate application and paying IHT.

The forms which must be completed, alongside the pitfalls of administering an estate which may be complex with numerous assets, often means that executors decide it’s prudent to get legal help.

Our specialist probate lawyers provide an experienced, practical and cost effective advice and services, so please do get in contact to find out how we can help and the fees.

The IHT part of applying for probate -what’s involved?

The following are some of the key overview points to note :-

You must file an IHT return within 6 months of the death, even if no tax is due. Failure to do so can result in penalties.
Identify any IHT exemptions and reliefs -- explore potential exemptions like the residence nil rate band, spousal exemption, and charitable donations. These can significantly reduce your IHT burden.
Use online tools: HMRC provides online inheritance tax calculators that can estimate your tax liability based on the estate's value and available reliefs.
Stay organised and keep records - maintain a clear understanding of deadlines, payments, and communication with relevant parties.
Discuss options with beneficiaries - if selling assets isn't feasible, consider discussing potential contributions from beneficiaries to meet the deadline. Transparent communication and collaboration are key.
Explore payment options -HMRC offers payment plans for outstanding IHT. Contact them as soon as possible to discuss your situation and negotiate a suitable arrangement.
You will need to complete the appropriate IHT return form depending on the complexity of the estate. These include:
- Inheritance Tax Account (IHTA): Used for simple estates with assets below £500,000.
- Inheritance Tax Return (IHT400): Used for more complex estates or those exceeding £500,000.

Raising funds to pay the IHT

One of the problems for executors is to balance the need to act thoroughly in maximising the value of assets which need to be sold whilst not rushing through the process. This can create a dilemma.

Executors should assess all the available assets and debts and then see whether, if property cannot be sold prudently within 6 months of death, whether :-

Life insurance policies can provide a lump sum to cover the tax bill.
Loans may be an option for beneficiaries, though this can complicate inheritance.
to apply for an extension of time to pay the IHT, but interest will accrue on the outstanding amount.

Dealing with HMRC – asking for an extension of time to pay

Open communication with HMRC about your situation can help negotiate potential payment extensions or solutions. Options for extending the deadline beyond the standard 6 months may include :-

Hardship Claim: You can apply for a "reasonable excuse" extension if unforeseen circumstances beyond your control prevent timely payment. HMRC will make a case-by-case assessment.
Payment Plan: If you can demonstrate financial hardship, HMRC may agree to a payment plan to spread the debt over a longer period with accrued interest.
Asset Sale: You can request additional time to sell assets to raise funds for the IHT payment. However, you may need to provide a detailed plan and timescale to convince HMRC.

Possible pitfalls with the probate and IHT application process

Completing IHT and probate forms can be tricky, and even small mistakes can have significant consequences. Here are some of the pitfalls to watch out for:-

Failing to disclose all assets - omitting assets from the declaration can have serious legal consequences, including fines and potential prosecution. Be transparent and disclose all assets in the estate.
Incorrect information - inaccuracies in dates, values, or personal details can delay processing and potentially lead to penalties. Double-check every entry before submitting.
Missing information - incomplete forms will be returned, causing delays and additional stress. Ensure you've included all required information on each section.
Misunderstood questions - the forms can be complex and use legal jargon. If unsure about a question, seek clarification from a tax advisor or HMRC before answering.
Tax miscalculations: - -incorrect calculations of IHT liability can result in underpaying or overpaying the tax. Use HMRC's online calculators or consult a professional for accuracy.
Undervaluing assets - assets like property, investments, or valuable items should be accurately valued. Underestimating their worth can lead to underpayment of IHT. Consider professional valuations if needed.

Financial and legal penalties and risks

These can include :-

Default Surcharge - if you're late in filing the IHT return or paying the tax, HMRC will automatically charge a default surcharge, typically 15% of the unpaid tax. This penalty can increase further if the delay continues.
Negligence Penalty - if HMRC determines that the underpayment was due to carelessness or deliberate action, they can impose a negligence penalty. This can be up to 100% of the unpaid tax.
Interest Charges - interest accrues on any unpaid IHT from the due date until payment is made. This can significantly add to the final amount owed.
Prosecution - in extreme cases of deliberate tax evasion, you could face criminal prosecution and potential imprisonment.