Bridging The IHT Gap: When Asset Rich, Cash Poor: Comment

Simon Dawson, 22 October 2021


Probate lending is a developing area. This practitioner explains what is available for HNW estates when families are forced to pay a large IHT bill before an inheritance comes through.

Meeting obligations to pay inheritance tax is a stressful time for families, which has been arguably made worse by probate delays caused by the pandemic. It can be especially difficult for wealthy families when the bulk of their wealth is wrapped up in iliquid assets such as property or land, and they are facing a deadline to pay the IHT bill before the inheritance comes through. Meanwhile, the UK is taking more IHT revenue. UK figures from the government show that inheritance tax  receipts for April to September 2021 were £3.1 billion ($4.27 billion) - £700 million higher than the same period a year earlier. 

Author Simon Dawson, chief commercial officer of at Legacy Release, an HNW inheritance lending specialist, explains what solutions are available to HNW families to bridge the gap as more specialist services come online.

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When a friend or family member passes there is a necessary period of mourning and reflection but, for those trusted by the deceased with the role of executor, thoughts quickly need to turn pragmatically to financial matters. The challenge of discharging estate liabilities, financing probate costs, and fulfilling the wishes and instructions of the will can be complex. This is exacerbated when the estate is asset rich and cash poor.

Recently released HMRC data shows that high net worth estates with a taxable value over £1 million have an asset composition of predominantly securities and UK residential buildings, whereas estates with a value of less than £500,000 are more likely to include a higher proportion of cash liquidity.

What this means in reality is that the ability to pay the inheritance tax (IHT) bill of up to 40 per cent and other expenses in larger estates, is considerably more challenging than lower-value estates, which have greater liquidity. The paradigm is that property and investment wealth doesn’t always translate into cash wealth. Those that are considered wealthy and high net worth, are often cash poor due to the nature of their investments.

IHT net widening
In the last tax year, the government took around £5.4 billion in IHT, with the IHT bill averaging at around £209,000 in 2018/19, according to recent HMRC figures. Estates valued at £1 million plus accounted for roughly 80 per cent of IHT tax collected. Though there are several exemptions and reliefs that can reduce the exposure to IHT. With the nil-rate-band and residents-nil-rate-band now frozen at £325,000 and £175,000 by Chancellor Rishi Sunak, respectively until 2026, and house prices anticipated to jump by around 17 per cent by 2025, increasingly more estates will be caught in the ‘IHT gap’. There is potential that IHT receipts could increase by a further 16.6 per cent, growing to £6.3 billion by 2023/24, as predicted by The Office of Budgetary Responsibility.

The big question is liquidity
Considering that the administration of the estate, which within it includes the property, investments, cash and other possessions, is reliant upon the settlement of liabilities which includes IHT, the big question is how can HNWs – be it in the role of an executor or a beneficiary – find liquidity and source the appropriate finance to bridge this ‘Gap’?

What are the options
One is remortgaging and gaining accessible equity within beneficiary property through this means. However, this is time consuming and could result in fees and untimely redemption penalties, in addition to compromising the property valuation due to prevalent market conditions.

Another port of call for the beneficiaries is to access personal funds, as in HNW estates there is often insufficient cash. However, as figures show that average IHT bills are in excess of £200,000, this isn’t a feasible option for many HNW estates.

Taking out a short-term loan, in order to bridge the ‘gap’ between the IHT bill being due and the distribution of the estate assets, is the only true feasible option in most circumstances. In the past, secured and unsecured lending in such circumstances was provided by banks, but many don’t cater to the inheritance advance market anymore – those that do entail complex and costly processes.

At present, such loans can be applied for through dedicated probate finance lenders that are able to give simple solutions to complex issues. Secured against the estate and not on the individual borrower, the repayment is required only following the grant of probate and the distribution of assets. These loans are flexible in nature – they can be used to cover any costs, as long as they are relative to the value of the estate or proportion of the estate and are available to both beneficiaries, who need to advance the benefits of the forthcoming inheritance, and executors, who are ultimately responsible for the IHT bill.

Currently, there is only a handful of providers offering competitive and compelling solutions, and the UK market for dedicated inheritance or probate lending is still very much in its infancy. Being cash and time poor, HNW individuals need clear solutions, which can be provided promptly without adding fuel to existing emotional and stressful circumstances.

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