Do you have to pay an inheritance tax bill with a mortgage or in installments? | Inheritance tax
Q I was wondering if you could help me. My brother and I inherited the house from my deceased parents and due to the size of the estate we are left with an inheritance tax bill of £ 242,000. We paid £ 101,000 for it, but we still have £ 131,000 to pay and don’t have the cash to pay it. We plan to rent the house for £ 2,000 per month. Is it better to take out a mortgage on the property and pay the tax bill or pay it off at £ 24,000 a year?
A I’m surprised you’re making a decision now because the government guidelines say, “You must say on the IHT400 inheritance tax account form if you want to pay in installments.”
Since this form is used to determine the amount of inheritance tax owed, the person who completed the form must have checked the installments box for you. This is an option for inheritance tax paid on things that take time to sell, such as ownership and certain types of shares. And you can spread the equal annual payments over 10 years.
So – assuming the remaining £ 131,000 you haven’t yet paid is tax due on the value of the family home – that would mean paying £ 13,100 (plus interest) each year until the tax be erased. Even though the interest rate is currently 2.6%, it seems better than taking out a mortgage to completely wipe out the tax owed. And unlike a mortgage, the installment plan has no fees.
An important question is whether you and your brother were able to claim the transfer of the unused zero rate bracket because the parent who died first did not fully use their zero rate bracket leaving everything to your other parent. , for example. . If this were the case, that would mean that the available zero rate bracket to charge against your parents’ estate would be £ 650,000 instead of £ 325,000.
A larger portion of the estate would be tax-exempt if you have not yet claimed the zero rate for residence bracket of £ 175,000, which is available to children who inherit the house from their parents. As with the normal zero rate band, it can be doubled if it was not used when the first parent died. If you think you can claim these additional reliefs, I suggest you make an appointment with an accountant specializing in inheritance tax. You will also need to find your parents’ marriage certificate and copies of their wills to accompany the inheritance tax application forms.