Investment Platforms added to Direct Payment Scheme for IHT

As clients of Henwood Court will testify, estate planning has many facets, from what actually is the liability to inheritance tax (IHT) and the suitability of various mitigation techniques through to the affordability of any gifting strategy, especially in light of us all living longer and potentially needing to retain access to funds for meeting your own expenditures.

However, as a planner, one of the specific areas of estate planning I have found myself spending more time discussing with clients has been the practical aspect of how their executors actually meet the costs of IHT in order to obtain probate.

As a recap, any IHT that needs to be paid will need to be paid directly from the Estate, before any money is distributed to Beneficiaries. It is the responsibility of the person administering the Estate (known as the Executor or Administrator) to calculate and pay IHT.

The Probate Registry requires IHT to be paid before the grant of probate application.

IHT must be paid within six months of the person’s death. Payments made after the six-month deadline will be subject to interest and possible fines. This six-month period represents a maximum time limit as IHT must be paid upon submitting the IHT account to HMRC. Without first paying the IHT liability, HMRC will not allow the Probate Registry to release a grant of probate, and without the grant of probate Executors or Administrators cannot continue the administration of the estate.

Up until now the discussions with clients have considered options such as:

  • Use of cash within the estate to pay HMRC direct under the direct payment scheme.
  • Is there any life assurance in place, written subject to trust so that it does not form part of the deceased’s estate and thereby payable without the need for probate.
  • Possibility of Executors or Administrators arranging some form of short-term loan from a bank / building society.
  • Possibility of paying IHT by instalments to reduce level of IHT immediately payable.

Whilst the use of cash and availability of life assurance are obvious solutions, the opportunities represented by the others are more debateable.

The reality of an Executor or Administrator trying to arrange a short-term loan with a bank or building society is far from straightforward especially in light of the deadlines. The ability nowadays to have ‘meaningful conversations with your bank or building society’ – the days of the decision making local ‘bank manager’ are long gone – and the fact that the banks and building societies will no doubt want some form of security make this option far from straightforward.

The instalment option is a valuable option used in the past, but with the official HMRC interest rate for repayments being set at base rate minus 1% (i.e. 4.25% at present) the costs of the instalment option is now greater than it has been in the past, making it less attractive as an option.

However, there is now an alternative option for clients with investments held on investment platforms such as Transact. Transact was the first wrap service to launch in the UK, in 2000 and as at 30 September 2023 had under its discretion funds of £54.9bn.

Transact have recently announced that it has joined the ‘Direct Payment Scheme’ meaning that Executors or Administrators, can now instruct Transact to sell investments prior to obtaining probate in order to realise sufficient funds to pay IHT. On the sale of the necessary investments Transact would arrange to pay HMRC direct from the proceeds, thereby enabling the Executors or Administrators to apply to the Probate Registry.

We continue to monitor the market for additional platforms being added to the direct payment scheme, but there would appear to be positive movements in this area with the likes of Wealthtime intending to initially operate under a case-by-case basis.

Whilst there is still an advisory discussion to take place with Executors or Administrators on the various options available, this additional option could be invaluable in its flexibility and is a very positive development and is something which will form part of our discussions with clients and their professional advisers going forward.

As Benjamin Franklin said on the establishment of the US Constitution, “… but in this world, nothing is certain except death and taxes.” Whilst we never know when a client will die, this is no reason why advanced planning shouldn’t consider all of the various ‘What If Scenarios’ to ensure effective planning brings with it comfort and control for clients which in turn will keep any immediate post death planning from being as inconvenient as possible.

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