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If you haven’t already considered it, bridging finance can help you pay an inheritance tax (IHT) bill resolving some of the administrative challenges that make probate so difficult to complete.
When someone dies there’s a frustrating Catch 22 when it comes to paying Inheritance Tax (IHT) in the United Kingdom. You can’t pay the tax with assets from the estate and IHT must be paid by the end of the sixth month after a person’s death. However, probate (access to the estate’s assets) is only allowed if the IHT owed is already paid.
However frustrating, it’s not so difficult to see the reasons behind this challenge. Before paying taxes, beneficiaries may choose instead to spend their windfall on a new car, house or holiday. To avoid this, HMRC have put in place this requirement which also means that the executors cannot use the proceeds from the sale of the estate’s assets to even pay the IHT owed.
For many in the UK, passing wealth down through the generations is a generational priority, but IHT, which is required when an individual passes away, can be a real challenge. In these cases, bridging finance can be a good solution that allows a beneficiary to keep the assets.
As Stephen Clark from Finbri, a bridging finance company who arranges inheritance tax loans explains, “The burden of paying IHT comes at exactly the time when those that are beneficiaries are mourning the passing of a loved one. It’s a tough time. Thankfully it’s commonplace to appoint at least two executors in the UK, which means there’s support in place to deal with probate and share the responsibility for administering the will after a death. Paying IHT can be especially challenging if the estate is large. Speaking with an independent financial advisor or IHT specialist is likely the best option if the executor has questions about how they’ll pay the IHT. My advice would be to try and do this as soon as possible as 6 months can go by very quickly.”
What is a bridging loan for inheritance tax?
A bridging loan for inheritance tax purposes is a short-term loan that must be repaid (with interest). The typical probate process can last for 300 days, so the term of this bridging finance is usually set in excess of 12 months but no more than 24 months.
It’s important to understand that if the loan is not repaid in full, the assets against which the loan is secured may be repossessed instead. While a bridging loan may be the answer to many of the problems that estate executors face, it’s crucial to speak with a financial advisor before taking this route.
When do you need a bridging loan for inheritance tax?
Because it’s a highly flexible and versatile form of finance, bridging finance is suitable for meeting the needs of an inheritance tax bill. Before we look at how bridging loans can help, let’s first look at the requirements that inheritance tax imposes on individuals.
Inheritance tax is charged on estates worth more than £325,000 (or £425,000 if your property is passed on to your children). This means that any estate worth more than this will be assessed a 40% surcharge on the amount over the threshold. Even for estates that aren’t extremely valuable, this might result in a heavy bill: for example, a property worth £400,000, a car worth £5,000, and £20,000 in premium bonds would total £425,000, requiring a tax bill of £40,000. This is not a large inheritance, and it would be typical of many middle-class retirees; but, tax liabilities for larger estates can quickly mount. For example, if an estate contains a £1,000,000 home and another £250,000 in assets, inheritance tax will be a hefty £370,000 bill.
The necessity to dispose of assets is the principal burden this places on large estates. While a smaller estate may be able to raise the £40,000 required to pay the tax obligation without selling a property, even a wealthy family will find it challenging to raise £370,000 in capital within HMRC’s 6-month deadline. In many circumstances, the only way to get this much money is to sell off family assets, which usually means selling a property or to take out finance.
How can a bridging loan assist in the payment of inheritance tax?
The high value of some inheritance tax obligations may necessitate a rapid liquidation of an estate. Unfortunately, this can often mean selling assets for less than market value; for example, if a property must be sold quickly, sellers may be forced to accept a low bid. Anyone who has sold a property knows that six months isn’t always enough time to complete the transaction – especially if a chain-break occurs, then there’s no way to pay the inheritance tax.
Bridging finance gives executors of an estate a viable alternative because it can be utilised to provide some breathing room until long-term financing is sought. A bridging loan is frequently used to provide a financial “bridge” between the payment of a debt and the long-term financial solution that would normally be used to pay it off, so in this scenario to quickly fix an inheritance tax problem while the estate is being settled.
Bridging finance gives an estate’s executors a lot of freedom in how they pay off their inheritance tax obligation because it allows them to fund it without having to liquidate any assets right away. For example, a bridging loan may be taken out against the estate right away to pay off inheritance taxes, and the estate could subsequently be sold without the pressure of trying to sell quickly. Alternatively, the executors may be able to raise funds through long-term investments such as bonds or the sale of stocks and shares. Using a bridging loan to bridge the gap until these funds are in place allows executors to avoid liquidating an estate just to pay off inheritance bills.
Obtaining a bridge loan
Bridging loans are high-value, short-term loans secured by a first or second charge against an asset. This makes them extremely adaptable and suitable for settling inheritance tax difficulties because they can be set up fast and easily and secured against a wide range of assets. Many different assets can be used as security deposits for a bridging loan when resolving an estate, giving executors the flexibility they need to pay off the many necessary payments.
Although the majority of bridging lenders want “first charge” collateral for their loans, some will accept assets that have already been financed. Assets that are previously financed, such as houses or cars purchased under lease agreements, are referred to as “second charges.” Because the many distinct claims must all be settled, the ability to utilise these assets as collateral is extremely beneficial when resolving an estate; by aggregating these costs with the use of bridging finance, executors can quickly accelerate an estate’s settlement.