No rush to pay Inheritance Tax on residential property

Many clients we meet in our day to day work often have the mistaken belief that when a family member, relative or close friend dies they will be expected to sell the private residence as soon after death as possible and if not there will be financial and Inheritance Tax (IHT) penalties.

All too often these clients, who are still struggling to come to terms with the loss of a loved one, will overlook a specific piece of tax legislation which is there to help them, which is a shame because the relief mentioned below is deliberately intended to help people who are handling a deceased person’s affairs and settling the IHT liability.

IHT penalties can be legitimately avoided and initial IHT payments reduced if you (or the Executors of the estate) make use of a particular relief that permits the Executors to pay the IHT in 10 annual instalments on certain assets including:

  1. Land and buildings
  2. Agricultural land and buildings
  3. Business interests
  4. Certain shares and securities

Included under the first heading of land and buildings will be the deceased’s private residence, usually in the UK together with any other residential properties they may have owned – i.e. furnished holiday properties or an overseas villa/apartment.

By making use of this relief it will enable the property to be properly marketed and in many instances allows more time for essential repairs or improvements to be undertaken, particularly if the property had fallen into disrepair.

Often Executors will, unwittingly, accept the first offer which is made to them because they are concerned about meeting the IHT liability in full and distributing the estate as soon as possible. The IHT on an estate is due 6 months after the end of the month in which the death occurs – so for example if a relative died on 10 December 2014 the due date will be 30 June 2015.

Likewise, if the option to pay the IHT by instalments is used then the first annual instalment of one tenth of the liability will also be due on 30 June 2015 and then annually thereafter until the property is actually sold.

In many instances that we have dealt with, the ability to use this instalment option has meant there is less of a requirement to sell other assets (shares, antiques and collectibles) in order to fund a much larger IHT payment – which ordinarily needs to be paid before Probate is granted.

Having said that though, there is one downside to using the instalment option and that is the addition of an interest charge – currently at 3% (2.5% above base rate) on the outstanding IHT, which falls due on the annual instalment date – i.e. 30 June each year in our example.

So for example, if the total IHT was £10,000 and this relates entirely to instalment property – i.e. the private residence – then in year 2 the instalment due 30 June 2016 will include an additional interest charge of £270 (i.e. £9,000 x 3%) making a total payment of £1,270. This will obviously reduce each year as the instalments are paid.

Some would say this interest burden is counter-productive as the rate charged is higher than say the deposit rate on cash deposits but if the property increased in value during the period in which instalments were paid it would be cash generative. In many parts of the North of England property prices are starting to increase, if this continues Executors and their beneficiaries need to consider the timing of the residential property sales and how they fund any related IHT liabilities.