Unfortunately, it is all too common that testamentary matters are not discussed sufficiently prior to the probate process, leading to a lack of preparation and understanding amongst executors and beneficiaries.
One of the more challenging issues is that the inheritance tax (IHT) bill of up to 40 per cent has to be paid within six months of the respective passing of the friend or loved one. The probate process is extensive – often drawn out past this six month window, especially in the type of high-net-worth (HNW) estates that typically attract IHT – thus the financial ‘gap’ can be substantial. While the executor is accountable for the calculation and discharge of the IHT bill, it is the responsibility of them and the beneficiaries to agree the best approach for payment.
It is possible to mitigate or minimise IHT exposure through effective estate planning, with exemptions and reliefs in place to increase tax-free allowances from £325k up to £1m (excluding agricultural and business estates, as additional relief may be available). However, with nil-rate-band (NRB) and residents’-nil-rate-band (RNRB) frozen until 2026, and forecasts of around 17 per cent rise in house prices by 2025, this reduction in liability will soon be eroded – and more estates will fall victim to the ‘IHT gap’. Further evidence is that the number of properties valued at £1m-plus in 2020 increased by 8 per cent, hitting record-breaking numbers with 563k properties. Unexpectedly, 83 per cent of these are not in London.
Based on recent HMRC data, the government collected around £5.4bn IHT last tax year; the average IHT bill in 2018/19 was around £209k and came from around 22k estates. Interim data for this year shows IHT receipts in the first fiscal quarter of 2021/2022 were a record £2.1bn – approximately £500m higher than the same period last year. The forecast from the Office of Budgetary Responsibility (OBR) is for receipts of £6.3bn by 2023/24 – a 16.6 per cent rise.
With a growing number of HNW estates, clients are looking to lawyers to help guide them through the probate process. The type of investments HNW individuals possess makes them cash poor. As distribution of the estate contingent on the payment of liabilities how can lawyers support executors and beneficiaries to find the necessary liquidity and finance to bridge the ‘IHT gap’?
With the average IHT bill now in excess of £200k, it is unlikely sufficient beneficiary liquidity exists to settle the IHT charges. An alternative is for executors to work with beneficiaries to unlock property equity through re-mortgaging. However, this could cause delays, and penalties and fees in instances of early redemption.
The most realistic option is a specialist and short-term loan. The challenge for lawyers effectively intermediating is finding a solution that suits the needs of their client. The contemporary solution is a loan through dedicated probate financiers. Executor loans pose no personal liability to clients, as they are secured against the estate, not the individual borrower. Repayment is conditional, following the grant or probate and the distribution of assets.
Some executor loan providers go beyond provision for just IHT exposure, including financing of legal and professional fees in advance. This can be a game changer for firms, who no longer have to rely on fees and costs are typically deferred to estate distribution. The benefit of improved cash flow and a healthier balance sheet for a firm can be invaluable.
The IHT gap is fundamentally down to probate system delays, which exacerbate what is already a frustrating process. A contributor to probate procrastination is communication issues between beneficiaries. Whilst non-contentious in the legal sense, conflict on whether or when to sell estate property and assets is a familiar battlefield. Inheritance advance loans provide beneficiaries opportunity to compromise, by providing cash advances to those in immediate need, whilst leaving those who wish to follow a more considered and pragmatic approach the time to do so. Inheritance loans can be utilised for any purpose for the borrower's proportion of the estate, with no impact on the options available to remaining beneficiaries.
With only a small number of providers offering meaningful solutions, the probate loan market is relatively young. As more individuals are caught out by the ‘IHT gap’, firms are well placed to understand clients’ needs It is important lawyers familiarise themselves with the inheritance loan providers’ services to best serve their clients when they need it most.
Simon Dawson is chief commercial officer of Legacy Release, a HNW inheritance lending specialist: legacyrelease.co.uk...