Brace yourself for the painful blow of IHT

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Avoid leaving an IHT headache to your loved ones

HMRC doesn’t make paying an inheritance-tax bill easy. Make sure you know how the process works.

Most people have strong opinions about whether or not the inheritance-tax (IHT) system is fair. But many don’t realise until they have to pay an IHT bill that the process can feel like another painful blow at a very difficult time. If you have been named executor of someone’s will, it is your responsibility to arrange for the payment of inheritance tax where it is due.

Firstly, you need to value the estate, deducting any debts or liabilities such as credit-card bills or funeral expenses. Depending on the assets, you may need to hire professional valuers. Keep in mind that the valuation will also need to include any gifts the deceased made in the last seven years of their life, as these still count as part of their estate.

If the estate exceeds the IHT-free threshold, the tax due must be paid within six months of the death. This can cause problems, as it can take a while to gather all the information needed, and work out the final value of the estate. After six months, HM Revenue & Customs (HMRC) will charge interest on the unpaid tax, so it may be worth estimating the IHT bill and paying that within six months. If it turns out you overpaid, HMRC will refund the extra.

To pay an IHT bill you need to get a reference number from HMRC. Once you have that, you can pay the tax due either from the deceased’s bank accounts, if they contain enough cash, or by drawing on money held in National Savings & Investments, such as premium bonds. This money should then be sent straight to HMRC through a “direct payment scheme”.

However, this is where many executors face a Catch-22 situation. There may not be enough cash in the estate to settle the IHT bill, but you cannot sell assets to
raise funds without a grant of probate – and this is not granted until IHT is paid.You may be willing to pay the bill out of your own pocket, then reclaim this from the estate once probate is granted. But if this is not possible, another option is to get an executor’s loan from a bank in order to pay the bill.

This can then be repaid from the proceeds of the sales of assets in the estate – just keep in mind that there will be interest to pay on the loan. Note that with property it may be possible to sell a house before probate is granted, depending on whether the house was jointly owned with another person.

It’s also worth being aware that you can arrange to pay IHT bills with monthly instalments over ten years on assets – such as property – that may take time to sell, but HMRC will charge you interest. If you do pay by instalments, HMRC will not send you acknowledgements for the partial payments it receives – you’ll only receive paperwork once the whole debt is paid, so keep a note yourself.

Finally, another option for paying an IHT bill is to settle it with a life-insurance policy. Where the deceased has set up a policy in trust during their lifetime, the payment from this should not count towards the value of the estate. This will mean the money won’t be liable for IHT. This payment can be used to settle part or all of the IHT bill, without the need to wait for probate to be granted.

If you are considering getting a life-insurance policy for this purpose, then seek professional advice. It needs to be carefully set up to make sure it falls outside of your estate, and you need to leave written instructions that the payout is to be used to cover your IHT bill. Get it wrong and you could just boost the amount you give to the taxman.

Pocket money… straitened taxman is getting sloppy

• “Sloppy” guidance from the taxman is leaving the public “fumbling in the dark”, say Sam Meadows and Sam Brodbeck in The Daily Telegraph. Official tax liability guidance issued by HMRC is, in many cases, out of date, and calculators provide “ambiguous or misleading information”.

The problem particularly affects people who struggle to work out their child benefit, pension contributions or stamp duty. For example, HMRC’s child-benefit calculator only goes up to the 2016-2017 tax year, making it difficult for parents to work out if they should make additional pension contributions in order to maintain their child benefit. Meanwhile, the pension calculator is giving wildly inaccurate results on how much annual allowance a person has.

Finally, the official guidance on the additional stamp-duty rate is out of date and fails to reflect changes made in last year’s Budget. The errors show the “strain HMRC is under in the midst of an enormous cost-cutting programme”, says The Daily Telegraph.

• The Competition and Markets Authority (CMA) is forcing three car-hire websites to show the full upfront cost to customers, amid concerns that firms were advertising low prices online only to “slap on” additional fees and charges at checkout, says Rob Goodman in The Sun. P&P Associates, Affordable Car Hire and Flexible Autos have all been told they must include all compulsory charges in their initial upfront quote.

This means costs including fuel surcharges, young drivers fees and out-of-hours pick up charges will be included in quotes if they apply. The CMA has been investigating the car-hire industry for a year; in that time 30 leading firms have made their pricing “clearer and more transparent”.

• The Financial Conduct Authority (FCA), the City regulator, has reversed plans to loosen pension transfer rules, says Josephine Cumbo in the Financial Times. It unveiled plans last year to make it easier for pension advisers to advise clients to move their defined-benefit pensions.

But having found “significant evidence of unsuitable advice being provided”, the FCA has said it will not proceed with the changes. As it stands, advisers must “start from the position that the transfers are not appropriate for most clients”.