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Can I Get A Bridging Loan To Pay Inheritance Tax?
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Yes - it's common to use bridging finance to pay inheritance tax before it is due. In fact, using short-term finance can be a convenient means to handle some of the administrative issues that make managing probate so difficult.
One of the common issues that can arise during this process is that the inheritance tax bill is typically due before the estate is yours. This means it's not unheard of for benefactors to receive a large tax bill for an asset they don't yet own and therefore can't use to pay the bill.
It's a frustrating catch-22 that can be solved reasonably easily with a flexible short-term finance solution such as a bridging loan.
Why would someone use a bridging loan to pay inheritance tax?
Inheritance tax is imposed on the estate (the total value of the assets) of a person who has passed away. It is a form of taxation that occurs upon the transfer of assets from a deceased individual to their heirs or beneficiaries.
You can’t use assets from the estate to pay the tax
- HMRC requires payment of IHT at the end of the sixth month after someone’s death.
- But they will only grant probate (access to the assets of the estate) after they have received the tax they’re owed.
You can understand why. The beneficiaries might use their windfall to pay the school fees, start work on the loft extension, or buy a holiday home before they get around to paying the taxes.
However, it means the executors can’t use the proceeds from selling the assets of the estate to pay the IHT.
In some cases, this means finding the funds to pay the bill quickly, and a bridging loan can be a convenient option for this purpose.
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In this blog:
Probate loans vs bridging loans
What can you use as security for a bridging loan?
Who will give you a bridging loan?
Why else would you want a bridging loan to settle an estate?
How much is inheritance tax?
- In the UK, a deceased estate must pay inheritance tax at 40% on everything above £325,000 (the individual allowance for one person).
- The allowance is twice this amount for a married couple, payable after the second spouse dies.
- Beneficiaries don’t pay IHT on their inheritance, but they may need to pay income or capital gains tax later.
How can you pay?
- If there’s enough cash in the estate, an executor can arrange for a direct payment to transfer the money owed straight from the bank where it’s held to the HMRC, bypassing the beneficiaries.
- If there isn’t enough cash available, the executors can put up the money for the tax bill out of their own pockets.
- Or there are two types of loans available: a probate loan (also known as an executor loan) or a bridging loan.
Probate loans vs bridging loans
Probate loans, also known as executor loans, can be arranged quickly and are secured against the value of your inheritance.
A bridging loan, on the other hand, is secured against the personal property of the executor of the estate.
Probate loans are good because you have no personal liability for the loan repayments - it is automatically deducted from the estate when the Grant of Probate is completed. And if any assets have lost value, the lender loses out, not you.
However, they end up having higher interest rates compared to bridging loans. Bridging loans are good because they're generally a cheaper option. However, they come at a larger risk to the borrower in that they need to use their property as collateral for the loan.
If the assets in the estate don't cover the repayment of the bridging loan, your lender has the right to sell your property to recoup their debt.
While this may sound intimidating, it is common practice among property loans - mortgages, for example, are always secured with collateral.
If you're unsure which option is right for you, we recommend booking in with a specialist adviser who can look at your finances at a wider level and walk you through the pros and cons and process for each option.
We also have a full guide to bridging loans and a full guide to probate loans.
What is a bridging loan?
In the video below, our head of Bridging, Sam O'Neill, goes over the basics of bridging finance and its uses:
Fergus Allen
Head of Bridging
Let us do all the hard work of finding the right bridging lender for your circumstances.
We secure bridging finance for applications of all types, and we negotiate competitive lending to meet your needs and timescale.
What can you use as security for a bridging loan?
You can’t borrow against the property in the estate you’re due to inherit – because you don’t own it yet. You’re not legally entitled to sign any papers against the property, and a lender wouldn’t have any security for their lending.
- You can use another property you own as security. This can act as your bridging loan deposit.
- The property in the estate can be used as your exit from the bridge finance (your means of repaying the loan) if you intend to sell it.
- Your exit strategy must be agreed upon with a lender before they will pay out funds, and it needs to be achievable within the usual 12-month maximum term of a regulated bridging loan. (It may be possible to arrange an extension of the loan term if, for example, a sale is agreed upon for the inherited property but has yet to be completed.)
- The lender will need to feel confident that the estate is relatively uncomplicated and the will won’t be contested.
In very rare circumstances, a specialist bridging lender may be able to secure finance against a property still held within the estate. However, it's a rare occurrence and very difficult.
Who will give you a bridging loan?
Lenders are well-used to offering short-term finance to pay for inheritance taxes.
The assets which can be used to repay the loan can usually be clearly identified, having been valued for probate. Our brokers at Clifton Private Finance can introduce you to lenders who will offer you terms that suit the structure of the estate’s assets.
Why else would you want a bridging loan to settle an estate?
Families and family assets are seldom straightforward, and emotions run high when people are grieving.
Having access to short-term finance can take the heat out of a situation which could otherwise cause conflict:
- Retaining ownership of a family home: It’s not unusual for three siblings, say, to jointly inherit a family home that one of them wants to live in. In which case, there will be a delay in dividing up the assets until market valuations are agreed and a mortgage is arranged to buy out the other two siblings.
- Shares in a family business: There may a family business that need to be valued and, again, one of the beneficiaries may be directly involved in running the company, or want to acquire a controlling share.
- Need for early payment: It's quite common for one or more of the beneficiaries to have a more pressing need for a payout and be pushing to realise assets sooner than their full market value can be achieved.
Organising short-term finance until the estate is settled can avoid a fire-sale of assets and allow important financial decisions to be made in a measured way that will reduce family conflict. For an indicative quote, use our bridging loan calculator.
Clifton Private Finance can arrange estate finance for you
We have experienced advisors who specialise in arranging quick, short-term finance for situations exactly like this.
Bridging loan advice gives you the peace of mind you're making the right decision for your situation.
Our advisers will listen to the details of your situation and propose the best financial solution. Call us to arrange a convenient time to talk through the details and check you fit the criteria for a bridging loan.
0117 959 5094
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