Paying inheritance tax from deceased’s bank account

This is a common practical problem because HM Revenue and Customs generally requires at least some inheritance tax to be paid before a grant of probate or letters of administration can be obtained, yet the personal representatives cannot usually access the deceased's bank accounts without the grant. It creates a circular difficulty.

There is, however, a well-established mechanism to deal with this.

The Direct Payment Scheme:

Most major banks and building societies in England and Wales participate in what is commonly known as the Direct Payment Scheme, sometimes called the Bereavement Transfer Scheme. This allows the personal representatives (executors or administrators) to arrange for funds to be transferred directly from the deceased's bank or building society account to HMRC in payment of inheritance tax, without needing the grant first.

The process works broadly as follows:

1. The personal representatives complete the relevant inheritance tax return, usually form IHT400, along with form IHT421 which is the probate summary.

2. They also complete form IHT423 (Direct Payment Scheme bank transfer form). A separate IHT423 is needed for each bank or building society from which payment is to be drawn.

3. The IHT423 is sent to the relevant bank or building society, which then transfers the specified sum directly to HMRC.

4. Once HMRC has received the payment (or at least enough to cover the tax due on delivery of the account), they process the return and issue the IHT421 stamped or receipted, which the personal representatives then submit to the Probate Registry as part of the application for the grant.

Important practical points:

Not every bank participates, although most of the major high street banks and building societies do. It is worth checking with the specific institution early in the process.

The scheme only covers funds held in accounts in the sole name of the deceased, or in some cases joint accounts depending on the bank's policy and the nature of the joint holding.

The bank will not release the money to the personal representatives themselves under this scheme. The transfer goes directly to HMRC, which is the whole point of the arrangement.

If the deceased's accounts do not hold enough to cover the full inheritance tax bill, personal representatives may need to consider other sources, such as paying from their own funds (and reclaiming from the estate later), borrowing, or applying to pay the tax on certain assets by instalments. The instalment option is available for qualifying assets such as land, certain shares, and business property, spread over ten years, though interest accrues.

National Savings and Investments products can also be used through the Direct Payment Scheme.

If the estate includes assets that can be sold before the grant, such as certain listed shares through the share dealing arrangements some institutions offer, that can also be a route to raising the funds needed.

Timing:

There can sometimes be a short delay between the bank releasing the funds and HMRC confirming receipt, so it is sensible to build this into the timetable for the probate application, especially if there is any urgency.

In summary, yes, in practice inheritance tax can be and routinely is paid from the deceased's bank account using the Direct Payment Scheme, even before the grant of probate has been issued.