Cash Clinic: The taxing matter of dealing with hikes in inheritance charges

Published on Friday 4 September 2009 21:01

Q My dad died a month ago and his estate is still tied up. I'm aware that the government has increased the interest rate on the late payment of inheritance tax (IHT), but I don't know what that means for us.

What does the government mean by a late payment and are there any ways to avoid this in the future?

ST, Musselburgh

A At today's rates, if a person dies and their estate is worth more than 325,000 subject to a number of exemptions, there will be IHT of 40 per cent applied to the portion of the estate that is in excess of that amount.

IHT becomes due to be paid on the six month anniversary of the death. If it is paid after that date, interest becomes due.

Until now, the level of interest payable was strongly linked with the Bank of England base rate, usually a fraction above or below this figure. That changed this week, with the interest rate hiked from 0 per cent to 3 per cent (Bank of England base rate plus 2.5 per cent).

HM Revenue and Customs (HMRC), the public body that deals with the collection of IHT, has attempted to justify this decision by stating that this action brings the tax in line with other taxes and is part of its process to streamline all taxes. Alternatively, arguments have been offered that it is simply an attempt by HMRC to increase incoming funds.

It seems that there will be no leniency from HMRC when dealing with bereaved families who are unable to realise funds from their deceased relative's estate. It is not uncommon for funds to be tied up for longer than six months, particularly where the main or sole asset involved is a residential property. In this case, it may be that the only way to avoid the penalty interest being applied will be for the executors, beneficiaries or family members to pay the IHT due from their own resources, by way of a loan to the estate of the deceased. It will then be at the executors' discretion as to whether any interest is payable in respect of such a private arrangement.

It is relevant to note that HMRC has also made changes to the interest rate paid on sums that are overpaid to it. From September, the rate applied will be 1 per cent below the Bank of England base rate, subject to a minimum rate of 0.5 per cent.

&#149 Linsey Harlick is a tax, trust and succession planning solicitor with the private client and financial services department of HBJ Gateley Wareing.

If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [e-mail].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.

When our family was struck by cancer it prompted us to act

WHEN her daughter was diagnosed with cancer, the critical illness insurance over which Ailsa Staniforth had been procrastinating became a priority.

Staniforth lives in Scotstoun, Glasgow, with her husband and three children, one of whom was diagnosed with cancer four years ago.

"It came out of the blue without any warning," said Staniforth. "One minute we had a child who was running around doing gymnastics and the next we were in a cancer ward. If that happened to one of us, what would we then do to look after the kids?"

Staniforth and her husband, who run a small business in Glasgow called Apples Catering, had always viewed critical illness insurance as something that needed to be sorted out. But Staniforth noted: "From being something that we said we'd think about later it became quite a priority."

Having been through the experience of dealing with their daughter's illness, they knew what they wanted from their insurance. She said: "We came down to a couple of policies that we couldn't decide between and the Bright Grey policy had a thing called Helping Hand, which is great. If we had another ill child or we were ill then we would want to have that on our policy."

The Helping Hand service provides medical and practical help, even in cases where policyholders are not making a claim, and Staniforth said such support was very important to her. "There are so many things that you don't know about and getting this help is great."

Staniforth and her husband bought their critical illness policy through a firm called Dedicated Mortgages in Dunfermline. "They went through what was and was not covered and explained each policy clearly. My husband and I were quite specific in what we were looking for and everything was explained to us during the sales process."