Inheritance Tax, Probate, and the Need for Cash

Think of probate as a golden key. When someone passes away, all their stuff (we call this their ‘estate’) gets locked up. This includes money, property, and other valuables. Before you can access and distribute these items, you need this golden key, which is essentially a legal permission known as ‘probate’. Someone, usually mentioned in the will (like a trusted friend or family member), is in charge of getting this key and dividing the estate. This person is called the ‘executor’.

The Timing Challenge: Now, here’s the tricky part. The government wants the first part of the Inheritance Tax to be paid within six months of the person’s passing. But remember that golden key, the probate? To get it, you first have to pay the initial IHT amount. It’s like the government saying, “Pay the entry fee first, then you can get the key to the treasure.” So, your family might need to pay the tax even before they can access the funds left for them.

The Growing Impact of Inheritance Tax: Historically, IHT was mostly a concern for really rich families. But because house prices have shot up, more ordinary families find themselves having to pay this tax. In simple terms, more and more people are being caught in the IHT net. For instance, the government collected a whopping £5.4 billion from this tax in one year alone!

How Can the Tax Be Paid?

  • Using the deceased’s savings: If the person who passed away had enough money saved, this can be used to pay the tax.
  • Reviewing their investments: You can use the deceased’s investments to settle the IHT.
  • Your own savings: You might consider using your personal savings, with the idea of replacing them once the estate is unlocked.
  • Loans: As a last resort, you could get a loan. Some people might consider a ‘bridging loan’, which is a short-term solution but can be quite expensive.

The Controversy: Many find this system to be flawed. They argue that it’s unfair to push grieving families into a corner where they might have to borrow money to pay someone else’s tax. It’s like being charged an entrance fee to a party, but the wallet you need to pay it from is inside the party.

The Bottom Line: If you ever think your belongings or estate might be subject to IHT, it’s a good idea to have some cash easily accessible. This way, your loved ones can pay the tax without having to jump through financial hoops.

In essence, when it comes to Inheritance Tax, a little foresight and planning can save a lot of stress and money down the line.