When someone dies, inheritance tax can become one of the first major financial issues their family has to deal with.
But who actually pays it?
Is it the beneficiaries receiving the inheritance? The executors? Does the money come directly from the estate? And what happens if most of the wealth is tied up in property rather than cash?
Understanding who is responsible for dealing with inheritance tax — and where the money may come from — is an important but often overlooked part of estate planning.
Who Deals With Inheritance Tax After a Death?
In most cases, the people responsible for administering the estate — usually the executors named in the Will — are responsible for establishing the inheritance tax position.
If someone dies without a valid Will, administrators may instead be appointed to deal with the estate.
Their responsibilities can include identifying the deceased’s assets and liabilities, obtaining valuations, establishing whether inheritance tax is due and dealing with HMRC as part of the estate administration process.
The executors are therefore not simply responsible for distributing the inheritance.
They first have to establish what the estate owns, what it owes and what needs to be paid before the remaining assets can be distributed.
Does the Beneficiary Pay the Inheritance Tax?
People sometimes assume that each beneficiary simply receives a tax bill based on what they inherit.
For much of an estate, that is not generally how the process works.
Inheritance tax attributable to the estate is normally dealt with as part of the administration of the estate before the remaining assets are distributed to beneficiaries.
However, inheritance tax can become more complicated where particular lifetime gifts, trusts or other arrangements are involved.
The important point is that the executors need to understand the whole estate, rather than simply looking at what each beneficiary is due to receive.
How Do Executors Work Out Whether Inheritance Tax Is Due?
Before determining the potential inheritance tax liability, the executors need to establish the value of the estate.
That can mean identifying and valuing assets such as:
- Property
- Bank accounts and cash
- Investments
- Business interests
- Valuable personal possessions
- Certain trust interests
- Overseas assets
- Relevant lifetime gifts
They must also identify relevant debts and liabilities and establish which inheritance tax allowances, exemptions or reliefs may apply.
For a simple estate this may be relatively straightforward.
For a larger estate containing property, investments, businesses, trusts or significant previous gifts, the position can be considerably more complicated.
The £325,000 Nil-Rate Band
The standard inheritance tax nil-rate band is currently £325,000.
An additional residence nil-rate band may also potentially be available where qualifying conditions are satisfied, particularly where a qualifying residence is passed to direct descendants.
Married couples and civil partners may also potentially benefit from transferable unused allowances.
This is why simply saying:
“Inheritance tax starts at £325,000.”
does not tell you what a particular family’s eventual tax position will be.
The ownership of assets, family circumstances, previous gifts and overall value of the estate can all matter.
When Does Inheritance Tax Have to Be Paid?
This is where inheritance tax can create a practical problem for executors.
Inheritance tax is generally due by the end of the sixth month after the month in which the person died. Interest can become payable on tax that remains outstanding after the relevant deadline.
And in many cases, at least some inheritance tax may need to be dealt with before the estate administration can progress fully.
That raises an important question:
Where will the money come from?
What If the Estate Doesn’t Have Enough Cash?
Imagine an estate worth £2 million.
On paper, it appears wealthy.
But suppose the estate consists largely of:
£1.4 million property
£450,000 investments
£150,000 cash and other assets
The estate may have a significant value but comparatively little readily available cash.
If inheritance tax and other estate expenses become payable, the executors need to establish how those liabilities will be funded.
This is an estate liquidity problem.
And it is one reason why the size of an inheritance tax liability is not the only issue worth considering during estate planning.
Can Inheritance Tax Be Paid From Bank Accounts?
In some circumstances, money held with participating banks or building societies may be released directly to HMRC under arrangements designed to help settle inheritance tax before probate has been obtained.
This can help where sufficient cash exists.
But it does not solve the underlying problem where most of the estate’s value is tied up elsewhere.
What If Most of the Estate Is Property?
Property-rich estates can face a particular challenge.
A family may own a valuable home but have relatively modest liquid assets.
The executors could therefore potentially face a situation where substantial tax is due while much of the wealth remains locked inside the property.
Depending on the circumstances, inheritance tax relating to certain assets may be eligible to be paid by instalments.
But this does not mean liquidity should be ignored.
The estate still needs a plan for meeting its obligations.
Could Assets Have to Be Sold?
Potentially.
Executors may need to consider the estate’s available resources and determine how debts, taxes and administration expenses will be funded.
That could involve using cash, accessing investments or, depending on the circumstances, selling assets.
This can become particularly uncomfortable where the main asset is the family home or where beneficiaries hoped to retain a particular investment or property.
The problem is not necessarily that the estate lacks wealth.
It may simply lack accessible liquidity at the time it is needed.
Why This Matters Before Someone Dies
Inheritance tax is often discussed as a percentage.
But families do not pay taxes with percentages.
They need cash.
That creates two separate estate-planning questions:
1. What could the inheritance tax liability potentially be?
and
2. How would the estate actually fund it?
An estate can have a perfectly clear Will and substantial assets while still having a potential liquidity problem.
Executors Need Good Information Too
There is another practical issue.
Executors cannot administer assets they do not know exist.
If records are incomplete, they may have to locate:
- Bank accounts
- Investment platforms
- Property documentation
- Insurance policies
- Pension information
- Records of lifetime gifts
- Trust documents
- Business interests
- Overseas assets
This is why maintaining an organised estate record can make such a difference.
Estate planning is not only about reducing tax.
It is also about making the estate understandable and manageable for the people eventually responsible for dealing with it.
Three Questions Worth Asking
When considering your own estate, three questions can therefore be particularly useful:
What might my estate be worth when inheritance tax becomes relevant?
Who will be responsible for administering everything?
Where would the money come from to meet inheritance tax and other estate expenses?
If the third question is difficult to answer, there may be an estate-planning weakness worth investigating.
Inheritance Tax Is Only Part of the Problem
A potential inheritance tax calculation tells you how large the liability could be.
It does not necessarily tell you how easily your family could deal with it.
Property ownership, investments, liquidity, lifetime gifts, documentation and executor arrangements can all interact.
That is why looking at the estate as one structure can be more useful than considering inheritance tax in isolation.
Understand Your Estate Before Your Executors Have To
Estate Architect examines how property, pensions, investments, inheritance tax exposure, liquidity and existing estate arrangements fit together.
A structured review can help identify potential weaknesses before they become problems for your executors or family.
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Estate Architect provides educational research and analysis relating to inheritance tax and estate planning concepts for UK residents. We do not provide regulated investment, tax or legal advice and are not authorised or regulated by the Financial Conduct Authority (FCA). Where regulated advice is required, introductions may be made to authorised professionals.