By Simon Dawson, Chief Commercial Officer at Legacy Release, a probate finance specialist.
The spectre of inheritance tax (IHT) looms for those left behind following a bereavement. Recent statistics show the forecast of IHT receipts rocketing by 40% over the next 6 years. This is largely due to high rates of inflation driven in part by surging house prices. Whilst it is prudent for IFA’s to advise their clients to prepare for the transfer of wealth, ‘in-life’ through optimising allowances, gifting and other tax saving provisions, it is inevitable for a growing number of estates that a significant IHT bill will become due after their passing.
It is the responsibility of those left behind to quickly understand the financial health of an estate and what resources are available to discharge liabilities as they arise. Whilst estate assets may be substantial in terms of value, frustration and stress occurs when cash liquidity falls short of the required levels to meet mounting costs and charges. This is because wealth is typically locked into assets such as property and investments that cannot be accessed before the grant of probate.
Though there are some charges and services which can be postponed until the estate is reconciled and settled, certain costs and disbursements cannot be avoided and will need to be dealt with during the probate process.
IHT itself needs to be paid within 6 months of the bereavement, with the average payment now in excess of £200k. Individuals can liaise with HMRC to arrange a 10 year instalment plan, to spread out the cost, however average bills can still amount to £20k.
The immediate consideration however will be the costs of the funeral and ‘send-off’. It is estimated that 40% of people fail to make sufficient provisions for their desired arrangements, with the average costs now at level of c£6.5k.
When attention turns to the administration of the estate, many will look to appoint a professional probate practitioner. Authorised IFA’s are well placed to continue supporting an estate after death. On straightforward estates professional fees will be between £2-3k, but as estates become sophisticated and complex, such charges will be substantially more and often invoiced monthly.
The costs that are often overlooked are those associated with the securing, maintaining and preparation of estate assets for sale. It is the executor’s responsibility to ensure that asset value is protected and therefore has a duty of care to put measures in place accordingly. As such costs are undetermined and tend to range in price quite vastly, it is easy to get caught out.
Trusted advisors should be the first port of call for executors and beneficiaries to help them determine how to meet such costs in instances where liquid assets are unavailable or are not easily obtainable.
The options, however, are relatively narrow and traditionally limited to ‘pooled’ savings, personal borrowing or specialist finance.
- ‘Fire Sale’ – Depending on the level of liabilities that need to be paid ahead of an estate liquidation and subsequent distribution; it is possible that sufficient possessions, artefacts, and valuables can be sold quickly to generate the required cash. Conflict may occur however if there is sentimental or emotional attachment to heirlooms and ‘family silver’.
- Pooled Finances – Executors can work with beneficiaries, and others with connections to the estate, in order to source the necessary funds to cover required costs. This often provides enough cash to advance the process and obtain a grant on most non or low tax bearing estates. Where tax liability and fees are more significant, the collective resources available may fall considerably short of the required amount.
- Personal borrowing – Taking out personal loans is an option for executors, but the number of lenders willing to advance sums at the required level is scarce. The few that will lend often take personal assets as collateral and require credit assessments.
- A new and innovative solution is a specialist probate bridging loan. Secured against the estate, such loans do not require an individuals to take on any risk. These loans are flexible in nature as they can be utilised to cover any costs, permitted such costs are relative to the value of the estate, and are available to both beneficiaries and executors. With many HNW clients being cash and time poor, this approach can help individuals release their inheritance in a timely manner and knowing that repayment of fees comes only after the distribution of assets relieves them of any financial concerns surrounding the process of probate.
Financial advisors can work with their clients to advise on the best solution based on their circumstances. However, with specialist loans offering a solution which removes any personal liability, executors and beneficiaries do not have to put themselves at risk by taking out personal loans. They can also avoid ‘fire sales’ of the family silver and allow heirlooms, which will no doubt have sentimental value, to stay in and be passed on in the family. Whilst there is typically an arrangement fee and interest associated with probate lending, this may be less expensive than incurring a redemption fee on a remortgage, ‘selling-short’ on investments, or the less tangible cost of convenience.
