Sonia’s £196,000 bill is fiction… but big death tax grab is REAL for millions

Inheritance tax divides opinions. Some argue that it should be abolished because it is a form of double taxation. Others argue that it is only paid for by the wealthy who can afford it – and so it is justified. But where opinions converge is how the tax is collected by His Majesty’s Revenue & Customs.

Everyone – whether tax experts or those responsible for the estate of someone who has died – agrees that the system is unfair and ripe for reform.

Why? It is because the tax is demanded before the executor or person administering the estate is given the power (award of probate) to sell the assets that are part of it.

A combination of a tax threshold freeze at £325,000 since 2009 and rising house prices has swept a record number of estates into inheritance tax territory.

As a result, more executors are landed with bills they cannot pay within the allotted time. In addition, they then owe interest on the outstanding tax.

It’s an issue EastEnders screenwriters have picked up on. When Dot Cotton, one of the BBC soap’s most popular characters, died last year following the death of June Brown (the wonderful actress who played her), step-granddaughter Sonia Fowler stepped into the breach to arrange the funeral. She inherited Dot’s house in fictional Walford, part of London’s East End. But what Sonia didn’t realize is that it would trigger a £196,000 tax bill.

When she received the acknowledgment letter, she wondered if she would have to sell the house to pay the bill, leaving her homeless (the story continues).

Someone with a strong opinion on the subject is Alan Miller, founder of asset manager SCM Direct. He believes that inheritance tax is double taxation and should be abolished. But his biggest complaint concerns the way the tax is collected. He says, “While some might say the government needs all the money it can get in estate taxes, the system for collecting it is both morally and intellectually bankrupt.

‘Instead of an individual benefiting financially when someone close to him dies and donates wealth to him, he may be materially worse off for quite some time. Numerous politicians and numerous tax experts recognize that tax reform is urgently needed, but nothing changes.’

He adds, “In 1789, American statesman Benjamin Franklin said, ‘Our new constitution is now established, and has a radiance that promises permanence; but in this world nothing is certain except death and taxes.’

“Well, in the UK nothing seems more precarious and unfair than the UK death tax system.”

When someone dies, their estate (consisting of their possessions, possessions and assets) may be subject to 40 percent inheritance tax. But there are surcharges to ease the tax bill.

The first £325,000 of an estate (the zero rate band) is exempt from tax. There is an additional zero tax rate for residents of £175,000 if the family home is given to children or grandchildren, although this is lower for estates worth more than £2 million.

For couples, any unused zero rate band when the first person dies can be transferred to the survivor, potentially increasing the zero rate band to £650,000. The same applies to the resident zero rate band. So for couples, up to £1 million of their estate can escape inheritance tax.

About one in 20 estates is subject to inheritance tax. But the tax grab is increasing and more estates are being sucked in to pay. Last year, between April and December, £5.3bn in estate taxes were collected by the Inland Revenue & Customs – £700m more than in the same period a year earlier.

With the government already saying that both the current zero rate and the resident zero rate will be frozen until at least April 2028, tax revenue will only go one way. Up… and up.

All rather depressing. But there are a number of legal steps a person can take during their lifetime to minimize inheritance tax. This includes a number of donations. For example, £3,000 can be gifted each year free of inheritance tax, while larger gifts can be made tax-free, provided you live seven more years.

Still, an estate tax bill isn’t the only sting in the tail for an executor presiding over an estate. It’s when the taxes are due. Executors can take on an unexpected financial burden.

This is because tax must be paid on most assets, other than houses, before the Inland Revenue and Customs Department issue an Inheritance Certificate (in Scotland this is called a Confirmation). An award of probate is the document by which the proceeds of the estate can be distributed among the beneficiaries. No tax payment, no inheritance right.

Delays of up to five months in the processing of executor paperwork by both the IRS and Customs have exacerbated the problem. Some executors do not have the financial means to pay this tax bill and are forced to take out expensive short-term loans (bridge loans) to cover it.

If the tax is not paid by the end of the sixth month after the person’s death, the IRS will begin charging six percent interest per year. In the taxpayer’s defence, it does allow inheritance tax due on immovable property to be paid in installments. But the outstanding amount will still accrue interest.

Alan Miller is perplexed by the whole system. Have you ever heard of a tax that must be paid on an amount of money or an asset before you receive it? It’s madness.’

It is indeed. Time for reform.

Have you been stung by an inheritance tax bill that you had a hard time paying? Email: jeff.prestridge@mailonsunday.co.uk