The loss of a loved one is never easy. As well as overcoming the emotional impact of the loss, you also have to worry about the financial responsibilities that arise when you lose a family member. A short-term loan/bridging loan is a short-term solution to assist beneficiaries in settling any liabilities prior to assets being liquidated
Inheritance Tax can be an unexpected and imposing bill which you may not have the capacity to pay, so taking out a loan to cover the costs becomes essential.
Bridging Finance Solutions offers a short-term cash flow solution for people who need support paying their Inheritance Tax bills. In this guide, we will outline exactly what inheritance tax is and how to use finance to manage Inheritance Tax liabilities.
What is Inheritance Tax?
Inheritance Tax is the tax payable on the estate of someone who has passed away. In the UK, the current threshold for payment of inheritance tax is £325,000 or £650,000 for married couples and civil partners, so if an estate is worth less than £325,000, no tax is payable.
Inheritance Tax is passed on to heirs or beneficiaries and they are expected to foot the bill.
If an estate is valued above that threshold, you are expected to pay a 40% tax on the property, so if the estate is of a high value, you may have a huge bill to contend with. These unexpected bills can be challenging, which is why many people obtain inheritance tax loans to cover these costs.
Can I Get a Loan to Pay Inheritance Tax?
Lenders often provide short-term financing to cover the cost of inheritance taxes. Unfortunately, in uncertain financial times, it is more common than not for a beneficiary to require additional support when paying inheritance tax.
BFS are able to provide this additional support.
Short-Term Finance For Inheritance Tax
Short-term finance is a reliable and commonly used tool for managing Inheritance Tax (IHT). Because IHT can arise unexpectedly, those who inherit often don’t have the necessary funds to cover the immediate inheritance tax liabilities. In this case, people tend to turn to short-term financial solutions such as bridging loans.
Covering Immediate Inheritance Tax Liabilities
The debt is expected to be paid to HMRC within 6 months of the death of the original property owner. This can be a fast turnaround for a lot of people, and it can be hard to find the liquid assets in time to pay the bill. Because of this, people will turn to short-term finance to ensure that their tax is paid on time.
It is not uncommon for beneficiaries to turn to short-term loan solutions if they intend to sell the property or carry out necessary renovations, prior to a sale, to present their asset in a more marketable condition. Short term loans allows time to settle IHT liabilities whilst assets are being sold or liquidated.
Bridging Loans
Bridging loans come with a list of pros and cons, making them a popular solution for those looking for a reliable and researched short-term loan solution. Read our guide to the pros and cons of bridging loans for a full breakdown.
It is common for a beneficiary to obtain a bridging loan to pay inheritance tax. Bridging loans are quick, short-term financing options ideal for covering gaps until assets can be sold. This allows beneficiaries time to secure the necessary funds to meet their inheritance tax (IHT) payment deadline without feeling pressured to rush the sale of assets.
Short-Term Loans
A short-term loan from a bank or a specialist lender can provide the necessary funds to cover inheritance tax (IHT) obligations. Similar to bridging loans, these loans are typically for a short duration and are intended to be repaid within a specified timeframe (e.g. 6 to 12 months) after the estate has been settled.
How to Avoid The Forced Sales of Assets
Due to the time pressure that comes with inheritance tax deadlines, it is not uncommon for beneficiaries to be forced to sell their valuable assets in order to meet their payment obligations. Selling possessions under duress should be avoided where possible, as it often leads to assets being sold below market value.
By utilising short-term financing, heirs can avoid hasty asset sales. This allows them time to sell assets at a more favourable time or to consider other options for paying the tax.
Flexible Short-Term Payment Structures
Short-term financing options, such as bridging loans or unsecured loans, provide flexible repayment plans, including interest-only payments, which effectively alleviate immediate financial pressures. By opting for these solutions, you can confidently manage your cash flow, making only interest payments while you await the sale of the estate’s assets and the availability of funds.
Interest-only Loan Payments
Interest-only loan payments represent a widely utilised financial solution that enables the estate to maintain liquidity throughout the payment period, requiring the repayment of the principal solely upon the liquidation of assets.
Liquidity for Estate Management and Expenses
In addition to IHT, estates frequently face other urgent expenses that need prompt handling, including funeral expenses, executor fees, and costs for property maintenance and insurance. Short-term financing can offer the required liquidity to cover these estate-related costs while the estate is being fully settled.
Each situation is distinct, and costs can emerge unexpectedly, but they still need to be managed equitably. A key example of such a unique case is when the deceased owned multiple properties needing upkeep and incurring ongoing expenses. In these cases, short-term financing can help ease cash flow issues.
How Quickly Can I Arrange a Loan to Settle My IHT Liability?
One of the main advantages of this type of finance is speed. Depending on the complexity of the case, loans can be arranged within seven days. This rapid turnaround makes bridging loans the most effective answer to your tax liabilities.
Avoiding Penalties or Interest For Late Payment
In an already strenuous financial situation, the last thing that you want is to incur further expenses by not paying your IHT within the required timeframe. You are typically expected to pay the tax within 6 months, and if you miss this deadline, HMRC will charge interest on your overdue payments, increasing the overall costs of the tax liability.
By using short-term finance solutions, you can meet this deadline and avoid any additional costs.
These solutions may offer the following benefits:
IHT Loan for Beneficiaries
Sometimes, lenders might provide loans directly to the beneficiaries, assisting them in covering their tax obligations and preventing personal liability for any delayed payments.
It is important to remember that there are lenders that have your best interest in mind; you just need to be selective with those whom you work with. At Bridging Finance Solutions, we prioritise all of our clients and ensure we do what we can to offer fair terms on our loans.
Because our bridging loans are regulated, you can rest easy knowing that if you take out a short-term loan with us, you are dealing with an FCA-regulated company that operates with the highest standards.
Funding for Tax-Efficient Estate Planning
Short-term financing can sometimes be incorporated into an estate-planning strategy to address inheritance tax (IHT) liabilities before death. This is commonly found in “life insurance trusts,” where the life insurance policy is included in the trust to address future inheritance tax (IHT) liabilities.
This prior preparation can improve the situation for the deceased’s family and ensure that they are not surprised by unexpected costs.
Gifting Strategy Assistance
If an individual aims to reduce their IHT liability by gifting assets before death, such as using the annual exemption or the UK’s seven-year gift rule, short-term financing can help pay the IHT on gifts that surpass these limits until they are entirely excluded from the estate. This is especially important if a gift made within the last seven years still incurs some IHT due to the tapering rules. Assistance from a qualified lawyer for advice is essential.
Important Factors to Consider When Getting Short-term Finance
As we have established throughout this guide, short-term finance is an excellent solution if an individual would like to reduce the burden caused by IHT and ensure that they are meeting the payment deadlines.
Though there are plenty of benefits to using short-term finance, you should not enter into a contract blindly. You should consider the following when entering into a short-term financial contract:
Exit Strategy
Bridging loans in short-term finance typically focuses on a clearly defined exit strategy, such as liquidating property or assets from the estate. To prevent complications, the estate needs to have a well-structured repayment plan and exit strategy in place.
When picking a loan provider, they will likely expect you to establish an exit strategy before they agree to any loan plan, and it is vital that you only agree to an exit strategy that you will be able to complete.
Interest and Costs
Calculating the expected repayment costs associated with the loan is a fundamental aspect of securing a bridging loan. Determining the total borrowing cost, including interest, fees, and any early repayment penalties, is essential. Short-term loans can incur significant expenses, so it is essential to ensure that the estate can fully repay the loan after liquidating its assets.
Inheritance Tax Relief Options
If you are in a difficult situation where you simply feel unable to take on the full IHT cost, you must explore alternative strategies for reducing IHT exposure.
There are many options for securing discounts, such as nil-rate bands, spousal exemptions, or charitable donations, reducing the IHT liability. Combining these with short-term finances may lower the overall tax burden.
Relieve Inheritance Tax Stress With Bridging Finance Solutions
We hope we’ve established the importance of short-term loans in inheritance tax planning throughout this guide. These loans grant swift access to funds and help prevent forced asset sales and late tax penalties, allowing beneficiaries to arrange the sale of property or other assets.
At BFS, we will ensure that your tax obligations are settled quickly and without fuss. The application process is simple, and our team will be on hand to answer any questions. Do you want to know more about the advantages of short-term loans or enquire about a bridging loan? Get in touch with Bridging Finance Solutions to learn more about how we can help you.
