Everyone knows Benjamin Franklin’s dry witticism that “In this world nothing can be said to be certain, except death and taxes.” But what is the horror when they both arrive at the same time?
Already branded as the ‘most hated tax of all’, Inheritance Tax (IHT) is a particularly emotive topic as it impacts individuals when they are already at an emotional low. This discontent was brought to the forefront of press scrutiny following Chancellor Rachel Reeves’s recent Autumn budget, which announced that more people will be dragged into its net and compelled to pay tax at a higher level than ever before. Already it is forecast that IHT will raise £7.5 billion in 2024/25, and this will reach £9.7 billion by 2028/29. But the recent Reeves’ pronouncements will make this even higher.
In what appears to many to be a carefully co-ordinated strategy of boosting the tax take on several fronts – the Government and its agencies are then piling on the pain by delays and inefficiencies in its own systems which have the effect of raising the tax demand even further. This leads to government policy squeezing estates with assets (but not, necessarily, much liquidity) and their heirs through a dilapidated legal and administrative infrastructure which puts further stress on their resources.
Most prominent in the Chancellor’s hit-list of soft targets has been rural communities through changes to Agricultural Property Relief which, unless modified, reportedly have the effect of putting smaller farms out of business. As has been much discussed, the existing 100% relief for agricultural and business property will apply from 6 April 2026 only to the first £1 million of combined agricultural and business property with the remaining value subject to 50% relief. In addition, unused pension funds and death benefits payable from a pension (in some cases) will be brought into a person’s estate for inheritance tax purposes with effect from 6 April 2027.
Meanwhile, a limitation on the availability of Business Relief was also announced with the effect that the Government will reduce from April 2026 the rate of Business Property Relief available from 100% to 50%. And then, of course, there was the much-critiqued change of approach on non-doms, who may be set to pay more in the changes to their currently preferential UK tax status (although the Chancellor’s comments at Davos suggest that she might be rowing back on this).
The cumulative impact of these new demands is being made worse by the failures within the very Government departments and agencies with whom the public has to interact to meet their tax obligations. Delays in payment of tax means extra charges – delays are often caused by other arms of the public system such as the Probate Registry and a critically under-resourced system. However, it is important to note that they do arguably need the tax take to be able to fund improvements.
The net result of these changes means that more people and more estates will be pushed into paying IHT. If individuals have the right advice from an estate planning solicitor, tax advisor, accountant or independent financial advisor then they can still, even now, mitigate the impact of this – for example by relinquishing assets they do not need. However, this cannot be done overnight. Time is needed to put new arrangements in place. In the absence of time – say through an unexpected death or just by being elderly – then the scope for manoeuvre becomes very limited.
Currently the estate of a deceased person will be liable to pay Inheritance Tax at a flat rate of 40% if it is worth more than £325,000 plus, in some cases, an additional allowance of up to £175,000 is available for a home (however this allowance is not available to all).
If a person has a pre-deceasing spouse their estate may (in certain circumstances also claim their pre-deceasing Spouse’s unused £325,000 and £175,000 giving a maximum on second death of £1,000,000) . Payments are permitted by HMRC to be staggered but the first Payment on Account (as it is called) of the tax due must be delivered by the end of the sixth month after the death occurred. Hence a death on 1st January means the Executor has until the 31st of July to make the first payment. Moreover, there are special arrangements available which allow for instalments to be paid on certain assets such as Real Estate for a period of up to 10 years.
Of course, while these deferred payments make the process more manageable, they do come at a price.
Interest is charged currently at a rate of 2.5% above the Bank of England Base Rate. However, in another hike, from April it will be paid at a rate of 4% above Base Rate adding further to the bills. And while HMRC encourages those who can do so to pay more than the minimum on the first Payment on Account – and thereby receive credit interest on it – there is a catch. The interest rate charged on money owed is significantly higher than the taxpayer receives on any credits. The figure currently paid by HMRC sits at 3.75% by comparison with what would be the interest in their favour of 7.25%.
All this has to be put in the context of the problems with the Probate Registry and the lengthy administrative procedures which must be completed before getting to that point. Bearing in mind (as mentioned above) that the first Payment on Account to HMRC must be delivered at the end of the sixth month after the death the time scale is already tight. However, in practical terms it is often nigh impossible to gather all the initial information to be able to submit an IHT 400 account with accurate information by that time, and often people are still to some degree relying on estimates of the likely tax.
This is particularly true in the more complex estates, where ever increasing inefficiency with the various asset holders – some of whom are Government sponsored such as NS&I – means it can often take much of that six month period simply to gather the necessary information to complete the IHT 400 (the form needed to report the estate for IHT purposes). If the main asset of an estate is a property, then there may not be enough cash readily available to pay the first instalment, and loans or an HMRC application for a ‘’Grant on Credit’’ may be needed, thereby adding further delays to the process. In a kind of Catch-22 scenario properties cannot in most cases be sold without a Grant of Probate and that has the knock-on effect so that in its absence money from any potential sale will be not available to meet the HMRC payment and interest will accrue.
So, what happens next?
In those circumstances where an estate cannot raise enough money to pay the first Payment on Account within the due period HMRC have an application process for what is called a ‘Grant on Credit’. This allows the Executors to apply for Probate without having settled some or all of the first Payment on Account. This, naturally, is not an easy process. It requires satisfying a number of conditions, jumping through various hoops and giving significant undertakings.
Once that stage has been satisfied, however, HMRC should then issue a ‘Unique Probate Code’ which allows the Executor to demonstrate that they have cleared the first hurdle (paying the first IHT instalment or getting permission for a Grant on Credit) and can now apply for Probate.
Unfortunately, at this point a further administrative obstacle pops up. Although there are no official figures available, experience and anecdotal accounts suggest that HMRC regularly fails to meet its own target of issuing the ‘Unique Probate Code’ within twenty working days of reviewing the application. A frustrating but all-too familiar sequence of exchanges then unfolds. The officials will say that they have issued the code, but it does not arrive with the Executors or their legal representatives.
Following several further follow-up calls the officials explain that it will be “re-sent’’ whereupon several backdated copies arrive together a week or so later. Indeed, it is no secret that HMRC employees themselves will often admit on the telephone that they are working in an increasingly pressured, under resourced environment where mistakes can and do happen.
Having received the all-important code, the Executor can then proceed to apply for Probate. However, applying for probate becomes just another challenge where, despite the best efforts of Court workers and Probate Solicitors, the target of 16 weeks is often just wishful thinking. The HMCTS site currently says 12 weeks, but they are still often quoting 16 over the phone. The way the rules work executors are not allowed to chase an application until it is 12 or 16 weeks (depending upon which timescale the handler thinks they are working to) from the date when it was uploaded – and this is despite the confident claim on HMRC’s website that “You’ll usually get the grant of probate or letters of administration within 12 weeks of submitting your application.”
Ever since the pandemic, the Probate Registry which is overseen by His Majesty’s Court and Tribunal Service, has experienced significant delays and currently does not take telephone calls after 1pm in an effort to tackle the backlog. They are making progress with some applications coming through within days whilst others still languish having been submitted more than 16 weeks ago.
Given this obstacle course of a complicated procedure compounded by delay, confusion, and inefficiency on the part of the Government’s administration, it has now become reasonable in the eyes of some to question whether it is justifiable (notwithstanding the Chancellor’s repeated mantra of the need to ‘fill the black hole in the Government’s finances’) to increase the rate of interest paid on Inheritance Tax when there is little likelihood of the Base Rate dropping substantially in the foreseeable future.
The Court and HMRC systems are providing a service operating at a level far below what customers might reasonably expect and they do so is in a way which allows the Government to benefit financially from taxpayers at a particularly stressful juncture in their lives.
Death and taxes might be inescapable, but surely better should be expected of the British Government and legal system?
If you need help understanding inheritance tax and planning your estate effectively, contact our expert Private Client solicitors by email or call +44 (0)3333 231580.
