The housing slump could “leave those who inherit property facing huge tax bills”, says Liz Phillips on Thisismoney.co.uk. HM Customs & Excise expects inheritance tax (IHT) due on any “death estate” – the assets of the deceased, including property – to be paid by their executor within six months of the end of the month of death, and in one lump sum. So if the deceased leaves a property worth £400,000, after the tax-free allowance of £312,000 is deducted, IHT is due at a flat 40% rate on the residual £88,000. That’s a bill for £35,200. Not got that kind of money lying around? Well, thinks HMCE, just sell the house.
The trouble is, in today’s stagnant property market, you can’t. As prices have fallen, property has become very hard to shift – Hometrack reckons that on average it takes six months from offer to completion, assuming you can find a buyer at all. Worse still, the “probate” valuation of property for IHT purposes, says Government website Direct.gov.uk, “must accurately reflect what the asset would fetch in the open market at the date of death”, not at the date of sale. So you could be faced with taking six months or more to sell an asset that is losing value, so that you can settle a tax bill based on a higher valuation than you are likely to achieve if and when you shift it. Hardly an ideal situation.
Fortunately, there is one very useful concession that applies to certain assets, including “land and buildings” – paying the tax bill in instalments. This allows you to defer the IHT owed and pay it over ten years rather than all at once. On the downside, you must remember – at what may be a stressful time – to write to HMCE telling them that this is what you plan to do. Otherwise the usual six months rule applies for the full amount.
Also, assuming that you pay the first instalment on time – say 10% of £35,200 from the last example, or £3,520, within six months of the end of the month of death, you will then be charged interest on the remaining £31,680 outstanding. So your next instalment will be a further £3,520 plus interest for one year on £31,680, and so on. One final joy: miss a payment date for any instalment and you will be charged interest on the instalment due for the period, from the due date to when you make the payment.