‘My estate will trigger a £350k inheritance tax bill – can it be paid without a loan?’

Email your tax questions to Mike via email: taxhacks@telegraph.co.uk

Dear Mike,

I have read your various comments on the iniquitous inheritance tax with interest, but I have not noticed any reference as to how an executor would obtain the necessary funds to meet this tax and so be able to obtain probate.

I am single with no children and expect my estate to be liable to IHT of between £300,000 and £400,000. Previous experience of obtaining a loan for IHT purposes for my mother’s estate proved to be a nightmare.

Despite being a former member of Lloyds Bank’s staff with experience in granting loans for this purpose, it took considerable time and effort to achieve an outcome that was satisfactory.

My brother, who is my executor, has approached his own bank, NatWest, in the last month to try to obtain some guidance from them, but to no avail.

As this cannot be a problem specific to my estate alone, I am wondering if you could comment in your Money section as to the best way to proceed.

I understand that some institutions will allow a certain amount of funds to be withdrawn from accounts with them prior to probate being granted, but in my case this would probably prove to be negligible.

I hope that publicising this problem as part of your campaign might have some influence in at least increasing the threshold, if not in abolishing the tax altogether.

Yours sincerely,

Roger

Dear Roger,

Thank you for raising this important matter. The problem is often referred to as the “Gordian Knot” by executors. They cannot obtain probate until the IHT due has been paid, but they require probate to be granted before they have the legal right to sell the assets required to pay the tax.

In normal circumstances, if you needed money for a short while you would ask your bank to arrange a loan but, as you say, banks can find lending to estates problematic.

Some years ago the Government introduced the Direct Payment Scheme whereby banks, building societies and NS&I were authorised to make payments directly from estates to allow probate to be granted.

You say that you are single with no children. This means that your nil-rate band will be limited to £325,000 because you will not qualify for the Residence Nil Rate Band. In saying that I am assuming that you are not a widower and therefore have no opportunity to claim a transferable nil-rate band. As a consequence, your IHT exposure is very high.

Sadly, I have little power to make the banks more cooperative. However, there are some practical steps you can take, as long as you arrange it in advance.

With your assets exceeding £1m I suspect some will be in shares or unit trusts, possibly held through a fund manager. Fund managers act for their customers in a nominee capacity. They are the legal owners, but the beneficial ownership remains with you.

You would need to check with the fund manager concerned but, suitably instructed, they may agree that after your death they would accept instructions from your executor to sell shares ahead of probate.

This is what I arranged some years ago for my mother. Acting on my instructions as her executor we were able to sell sufficient shares to pay all the IHT due and untie the knot.

If you have savings with a bank or building society you could consider placing them in a joint account, possibly with your brother. On death your brother would automatically become the legal owner. Because you would have remained the beneficial owner, he would then hold the funds on behalf of your estate and could use them to pay the IHT.

Alternatively, you might consider instructing a solicitor to set up a “living trust”. In this arrangement you would still control the assets you placed in trust and would continue to benefit from them, but you would cease to be the legal owner. The assets would remain part of your estate for calculating the IHT due, but they would not be relevant to probate and could be accessed by your executor.

Incidentally, if you hold offshore investments remember that probate may be required in the country where they’re held.

If your wealth is largely in your home, other property or certain qualifying shares there’s also the option to break up the IHT costs. Your executors can apply to pay the IHT by instalments over 10 years, as explained by Charlotte Gifford in her recent article.

I also suggest you set up a “Dying Tidily Log” for your brother. This should contain all the information he will need following your death, such as the location of the will, bank accounts and other assets held, insurance and pension arrangements and a record of lifetime gifts.

Finally, and in response to your last point, I sincerely hope that The Telegraph’s campaign can persuade the Chancellor to at least lighten the IHT burden, even if it cannot be abolished altogether.

In particular, it seems wrong that someone in your position should be faced with such a high effective rate of tax at death.