Q I wonder if you can help me. My brother and I have inherited my late parents’ house and due to the size of the estate we’re left with an inheritance tax bill of £242,000. We have paid £101,000 of it but still have a further £131,000 to pay and have no liquid cash to pay it. We do plan to rent the house out for £2,000 a month. Are we best taking out a mortgage on the property and paying the tax bill or paying it off at £24,000 a year?
JL
A I’m surprised that you are making a decision now because the government guidelines say: “You must say on inheritance tax account form IHT400 if you want to pay in instalments.”
Given that this form is used to work out how much inheritance tax is due, whoever filled the form in must have ticked the pay-in-instalments box for you. This is an option for the inheritance tax paid on things that take time to sell, such as property and certain types of shares. And you can spread the equal annual instalments over 10 years.
So – assuming that the remaining £131,000 you have yet to pay represents the tax due on the value of the family home – that would mean paying £13,100 (plus interest) every year until the tax is cleared. Even though the interest rate is currently 2.6%, it looks a better deal than taking out a mortgage to clear the remaining tax due in full. And unlike with a mortgage, the instalment plan has no fees attached.
An important issue is whether you and your brother were in a position to claim to transfer unused nil-rate band because the parent who died first didn’t make full use of their nil-rate band by leaving everything to your other parent, for example. If this was the case, then that would mean that the nil-rate band available to set against your parents’ estate would be £650,000 rather than £325,000.
More of the estate would be tax-free if you haven’t yet claimed the residence nil-rate band of £175,000, which is available to children who inherit their parents’ home. As with the normal nil-rate band, this can be doubled if it wasn’t used when the first parent died. If you think you might be able to claim these additional reliefs, I suggest you make an appointment with an accountant who specialises in inheritance tax. You will also need to track down your parents’ marriage certificate and copies of their wills to accompany the inheritance tax claim forms.
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