Inheritance tax payment before probate

This is a very common practical issue that catches many executors off guard, because HM Revenue and Customs requires at least some inheritance tax to be paid before the grant of probate is issued, yet the executor cannot usually access the deceased's assets until probate has been granted. It creates a circular problem that has well-established workarounds.

The legal position:

Inheritance tax on non-instalment property (things like bank accounts, investments, and personal possessions) must be paid before the probate application is submitted to the Probate Registry. HMRC will not issue the necessary receipt or confirmation that allows the grant to proceed until this payment has been made or arrangements are in place. The obligation to pay falls on the personal representatives, meaning the executors named in the will or the administrators on intestacy.

For instalment option property (mainly land, property, certain shares, and business assets), the tax can be paid in ten equal annual instalments, with the first instalment due six months after the end of the month of death. This means probate can be obtained before all of that portion of the tax is paid, though interest may accrue.

How executors typically fund the initial payment:

1. Direct Payment Scheme. This is the most common route. Under the Direct Payment Scheme, executors can ask banks and building societies holding the deceased's money to release funds directly to HMRC to pay the inheritance tax due. The bank sends the money straight to HMRC rather than to the executor. Most major banks participate in this scheme, and it is specifically designed to break the circular problem. The executor writes to the bank with the details and HMRC reference.

2. Borrowing. Some executors take out a short-term loan, sometimes from a bank or sometimes from a specialist probate lending provider, to cover the inheritance tax. The loan is then repaid once the estate assets are accessible after probate.

3. Payment from the executor's own funds. An executor can pay from their own money and reimburse themselves from the estate once probate is granted. This is perfectly lawful but obviously only practical where the executor has the means and is willing to do so.

4. Jointly held assets or assets passing outside the estate. Some assets, such as jointly held bank accounts that pass by survivorship, or life insurance policies written in trust, may be accessible without probate. These funds can sometimes be used to pay the tax bill, depending on the circumstances and the cooperation of the surviving joint holder or trustees.

5. National Savings and certain government stocks can sometimes be released before probate in limited amounts, and these can be directed towards the tax bill.

Practical points to be aware of:

The inheritance tax reference number must be obtained from HMRC before you can make payment. You get this by submitting the IHT400 form (or the simpler IHT205/IHT217 if applicable, though these are being replaced by online processes from 2024 onwards for most excepted estates).

Interest runs on unpaid inheritance tax from six months after the end of the month of death. So if someone dies in March, interest starts from 1 October. There is a real financial incentive to pay promptly.

Where the estate includes a property, executors often face a timing issue. They may need to sell the property to raise funds but cannot complete the sale without probate. The instalment option helps here, as does the possibility of obtaining a loan secured against the property pending sale.

Since January 2022, most estates that do not exceed the nil rate band thresholds no longer need to submit an IHT400 to HMRC at all. Instead, the information is provided as part of the probate application itself. This simplifies matters for smaller estates but does not affect the position for estates where tax is actually payable.

If you are dealing with a specific estate, the key first steps are to identify which assets are available before probate, calculate the tax due on non-instalment and instalment property separately, and then approach the deceased's banks about using the Direct Payment Scheme. That route avoids executors having to use their own money and is the standard approach used by solicitors handling probate.