It is many years since I have watched Eastenders but I understand this week, the character Sonia Fowler received a £196,000 inheritance tax bill for inheriting Dot Cotton's estate including her property in Walford. The liability has led Sonia to question whether she will need to sell the home in order to pay the inheritance tax, leaving her homeless.
Though of course this is a fictitious story line, many beneficiaries of estates face the dilemma of having to sell an inherited property in order to pay the inheritance tax due on the estate.
When a person dies, their executor (or if they have no will, their administrator, must calculate the value of their estate. The value is based on the assets and liabilities as at the date of death. It is vital that accurate valuations are obtained. Some estate agents believe they are doing the estate a favour by providing a lower probate value, but the property valuations must be the true open market value of the property even if the property is being retained by the beneficiaries. The district valuer at HM Revenue and Customs can challenge the values provided and request evidence for the valuation. If a higher valuation should have been included with the inheritance tax account then interest can accrue on the tax due on the additional value.
Every person on their death has an inheritance tax allowance, known as a nil rate band, which is currently £325,000. The nil rate band will be reduced by any life time gifts made within the seven years prior to death.
An additional allowance, known as the residence nil rate band, currently £175,000, can be claimed by the executor, if the family home is being left to direct descendants, namely children, step-children (through marriage) and grandchildren. The residence nil rate band has many conditions so it is important that the executors take advice to ensure this is claimed correctly. For example the allowance tapers once the estate is over £2million. The allowance also only applies to the value of the property. Therefore if the deceased's property was worth £150,000, only £150,000 of the allowance can be claimed.
If an estate is left to a spouse or civil partner then it will benefit from spouse exemption so there will be no inheritance tax payable. This means usually when the second spouse dies their executor can transfer the nil rate band and the residence nil rate band of the first spouse, potentially resulting in allowances of up to £1million.
If the will provides a gift to charity then this will benefit from charity exemption and no inheritance tax is due on that share of the estate. If more than 10% of the chargeable estate is left to charity then the rate of inheritance tax is reduce to 36%.
Certain business and agricultural interests and assets will also benefit from inheritance tax relief.
The estate over and above the allowances, exemptions and reliefs will be taxed at 40%.
Inheritance tax is apportioned between the assets in the estate. The tax due on liquid/cash assets must be paid within six months of the date of death and before the Grant of Probate can be issued. Most banks will release funds direct to HMRC from the deceased's account to pay the inheritance tax.
The inheritance tax due on properties can, should the executors elect to do so, be paid in ten annual instalments. However interest will accrue on the balance outstanding. If and when the property is sold within those ten years the balance will be payable.
If there are insufficient cash assets within the estate to pay the total inheritance tax due, then the property may have to be sold in order to pay this. If the beneficiary or beneficiaries wish to keep the property they will need to find a way to pay the inheritance tax due on the property. This could be through personal loans or trying to obtain a mortgage.
Whilst soaps will have fact checkers many story lines are exaggerated for dramatic effect. So many times I have commented on a tv shows "that never happens in reality". It is important when acting as an executor and calculating the inheritance tax due on an estate or when dealing with your own estate planning that specialist advice is taken.