Loans for inheritance tax and ‘grants on credit’

As part of its stated ongoing aim to simplify tax rules and to improve how taxpayers interact with the tax system, the Government has removed the requirement for personal representatives (‘PRs’) to prove that they have sought commercial inheritance tax (IHT) loans before they can apply for a ‘grant on credit’. This measure was outlined in the recent Spring Budget and came into effect on 1st April 2024.

Does the new measure make life easier for PRs?

The role of a PR

In very simple terms, PRs (i.e. executors and administrators) are responsible for ascertaining the value of the deceased’s assets, applying for the ‘grant’, collecting in those assets, paying all the deceased’s debts and liabilities, and then distributing to the beneficiaries in accordance with the terms of the Will or the Intestacy Rules.   

Acting as a PR can, at times, be a stressful and thankless task, particularly if the PRs are not also beneficiaries of the estate. There is also the ever-present risk of personal liability if they do not carry out their role with the required duty of care, with the incidence of beneficiaries taking legal action against PRs on the rise.   

What is a grant?

A grant is legal confirmation of the PR’s authority to deal with an estate and the term ‘grant’ here is used to cover all types of grants issued (not just the better-known ‘grant of probate’, which is the type that is issued to executors named in a Will).  

Obtaining the grant is key to ‘unlocking’ the assets in an estate as most institutions will not allow investments or other assets to be sold without sight of it. However, it is not usually possible to apply for a grant until any IHT due has been paid in full, which can create a ‘catch-22’ situation. 

What is inheritance tax?

IHT is charged at the rate of 40% on the value of the deceased’s assets at the date of death which exceeds the current tax-free threshold of £325,000 (or ‘Nil Rate Band’). For estates passing to direct descendants, there may also be an additional tax-free allowance of £175,000 per individual known as the ‘Residence Nil Rate Band’.  

When does inheritance tax need to be paid?

Where it is due, IHT is payable in full by the end of the sixth month after the date of death, otherwise HMRC will start to charge interest on the unpaid tax. As cash flow can be a problem, HMRC will allow the tax relating to some assets (such as land) to be paid in 10 equal yearly instalments, albeit with interest still accruing on any unpaid tax.  

In most estates, the nature of the assets means that PRs can also pay the IHT due using the ‘direct payment scheme’. This is where banks and some other institutions will pay the inheritance tax out of the deceased’s bank accounts or investments direct to HMRC before the grant is obtained, which will then enable the PRs to apply for the grant. 

However, one of the most significant challenges PRs can face is arranging payment of IHT where liquid funds are not available as they can find themselves in the ‘catch-22’ situation outlined above.

What is a ‘grant on credit’?

Where an estate consists only of land and/or very little in the way of cash at the bank or other liquid assets, raising funds to pay the IHT can be a problem for PRs. Where there are no such liquid assets (or the liquid assets are insufficient to meet all the tax due), PRs can apply to HMRC for a ‘grant on credit’ as a last resort. 

This is where HMRC will consider allowing postponement of the payment of tax so that the PRs can apply for the grant. Before 1 April 2024, HMRC would only issue a ‘grant on credit’ in limited and exceptional circumstances: PRs needed to show that they were unable to raise all the funds to pay the tax due and show that they had made “every effort” to raise the money, including trying unsuccessfully to take out loans from commercial lenders. 

What’s changed?

From 1 April 2024, PRs are no longer required to seek commercial loans before applying for a ‘grant on credit’. However, PRs are still nonetheless required to show that they have made “every effort” to raise funds to pay the IHT, including using their own funds, if possible. 

Conclusion

The removal of the requirement to seek commercial loans before applying for a ‘grant on credit’ will no doubt be a welcome change for some PRs (particularly professional ones), removing one of the barriers to apply for the grant during what can already be a challenging time. As stated above, PRs are still required to show that they have made “every effort” to raise funds to pay the IHT, including using their own funds, if possible. So, it makes their lives a bit easier, but not much. 

Although the Government states that the changes are part of its ongoing aim to simplify the tax system, making the lives of PRs ‘easier’ is possibly not their only motivation. For example, the Government may have also realised that requiring PRs to take out a commercial loan can often be a waste of time: lenders can reject an application where the nature of the assets in an estate do not provide adequate security to them and often professional PRs (who have no beneficial interest in an estate) may not be prepared to assume personal risk by taking out loans, both causing additional delays.

In its internal Inheritance Tax Manual guidance, HMRC will also consider issuing a ‘grant on credit’ “when it is not in the interests of the Exchequer for the issue of a grant to be delayed”. HMRC illustrate this by stating “Without the grant there might be significant delay in settling the tax debt. This may put the Exchequer at risk of losing the tax, especially if the nature of the assets fall in value. A grant on credit could be the key to breaking the deadlock and we should consider it as an option”. 

It is also worth remembering that HMRC will still charge interest (currently 7.75%) on any unpaid tax after the end of the six-month period. Where public finances are stretched, perhaps the Chancellor has also realised that it is to the Exchequer’s advantage for it to receive the interest accrued on the unpaid ‘postponed’ tax rather than private lenders benefitting instead.

The Birketts view

Navigating the pitfalls of estate administration can be difficult. Essentially, PRs owe a duty of care to the beneficiaries and should take steps to mitigate any financial loss to the estate where possible, taking into account all of the circumstances at the time. With more and more beneficiaries taking legal action against PRs, demonstrating that they have taken all reasonable steps to mitigate any loss is pertinent. Therefore, even if HMRC does not require PRs to seek a commercial loan before applying for a ‘grant on credit’, if there are better rates of borrowing in the commercial loans sector than HMRC is currently charging, PRs should explore all the financing options available to them, albeit in a relatively limited market.

If you are a PR and are unsure about anything to do with your role, duties, obligations and next steps, speak to our experts in the Private Client Advisory Team who can guide you through all aspects of estate administration.