Unscrambling the Inheritance Tax Dilemma: Financial Guide for Executors

A Telegraph reader, Roger, raised a pertinent issue that often baffles executors. It’s a chicken-or-egg type of situation, whereby executing a will becomes complicated due to IHT requirements. Executors need to pay due IHT to obtain probate, but they need the probate to sell assets necessary for paying the tax.

In simpler terms, probate is the legal stamp that allows executors to access and distribute the deceased’s assets. However, when a sizeable IHT bill is involved as in Roger’s case, things can get knotty. Unfortunately, a loan from a bank cannot always be an answer due to financial complications.

Exploring The Direct Payment Scheme

In response to this quandary, the Government brought in the Direct Payment Scheme, a system sanctioning banks, building societies and NS&I to make payments directly from the estates. This capacity aids in enabling the grant of probate but there’s a catch – they have a limitation on the amount that can be disbursed.

If you’re single with no children, just like Roger, your nil-rate band is capped at £325,000, ruling out the possibility of a Residence Nil Rate Band. Roger’s anticipated IHT liability far overshadows these constraints.

Possible Solutions for The IHT-Paying Conundrum

Although waving a magic wand and making banks more compliant isn’t possible, there are measures you can take to avoid this predicament.

Asset Sales with Fund Managers

If your assets are primarily in shares or unit trusts, these can be managed through a fund manager. These managers can sell shares on your executor’s instructions, thus generating enough cash flow to pay the IHT.

Proceeding with Joint Bank Accounts

Alternatively, your savings in a bank or building society can be held in a joint account with your appointed executor. Following your demise, the other account holder becomes the legal owner and can utilise those funds to pay IHT.

Setting up a Living Trust

Another method is to establish a ‘living trust’ with the aid of a solicitor. You maintain control and reap the benefits of the assets placed in trust, while ceasing to be the legal owner. The trust assets factor into your estate for IHT calculations, but aren’t relevant to probate, giving your executor access to them.

Expatriate Assets and Probate

Offshore investments are another wrinkle in the probate process. If you hold such investments, remember that you might require probate in the country where they’re held.

IHT Payable in Instalments

The executor can also break up the IHT costs over ten years if most of your wealth is tied up in your home or other property.

Keeping Things Organised with a “Dying Tidily Log”

It’s a good idea to set up a log for your executor containing crucial information needed after your death. A ‘Dying Tidily Log’ can include details about the location of the will, bank accounts, insurance and pension arrangements, and lifetime gifts.

In summary, dealing with the complexities of IHT can be overwhelming as an executor, but hopefully, by considering the options outlined above, this task can be a little less intimidating.