Inheritance tax has the potential to be difficult to pay, as usually nothing has actually been disposed of so there is no cash to pay the tax bill

If a death estate is lacking cash, how can you pay your inheritance tax?

Can you pay the tax man with a painting?
Yes. In a recent example, Titian's painting 'The Triumph of Love' which depicts Cupid standing upon a roaring lion was given to Oxford's Ashmolean Museum in lieu of inheritance tax (IHT). The rare painting has not been on display since 1960 and visitors will be able to see the work in the National Gallery from July 21 until September 2009, when it will then be moved to the Ashmolean.

What other assets qualify to satisfy an IHT bill?
As illustrated above, the tax rules allow for certain property to be given in lieu of IHT, following agreement between HM Revenue and Customs (HMRC) and the personal representatives of the deceased.

Property for these purposes can include, pictures, prints, manuscripts, works of art, scientific objects or other items which the Secretary of State is satisfied are pre-eminent for their national, scientific, historic, or artistic interest.

Land can also be given in lieu of IHT, together with certain buildings and potentially any objects within those buildings if it is deemed that they should be kept together. Again agreement must be made between HMRC and the personal representatives regarding the property to be accepted.

What should I do if I want to use property to pay an IHT bill?
Any enquiries regarding the type of property which could be used can be made to HMRC's Heritage Team. Any offer to transfer property in satisfaction of IHT must also be referred to HMRC as soon as possible, although offers are rarely accepted and no transfer can be made until the personal representatives have received a grant of probate.

The value of an asset would rarely be identical to an IHT bill and in the case of the Titian painting, as it was valued in excess of the former owner's IHT liability, the Ashmolean contributed £430,000 of which £180,000 was donated by the Art Fund Charity

Are there any other benefits?
Yes. In addition to satisfying the payment of the IHT together with any interest, the acceptance of the property in satisfaction of IHT also removes the value of that property from the death estate, reducing the value of the estate that is liable to IHT. However, the price offered for the property will be adjusted to reflect this (see below).

How are assets valued that are accepted in satisfaction of an IHT bill?
Normally, assets within a death estate are valued at the date of death. However, when property is being offered in satisfaction of an IHT liability, the initial price is established by reference to the date that the personal representatives offer the asset to HMRC. If the asset is accepted by HMRC, the price is then adjusted by negotiation to reflect the fact that the asset itself is no longer subject to IHT. If the value of the asset changes between the date that it is offered to HMRC and the date that it is accepted by HMRC, the personal representatives have the option to request a valuation based on prices at the acceptance date instead. Similarly, if more than two years elapse between offer and acceptance, HMRC can give six months notice that it is no longer willing to accept the assets on the basis of prices at the offer date. If an 'offer date' valuation is agreed, interest on the IHT to be satisfied by the transfer will cease to accrue from the offer date.

Will the personal representatives pay capital gains tax?
Normally, where an asset is disposed of by the personal representatives for a value in excess of the value at the date of death, any profit in respect of that asset will be subject to capital gains tax. However, a special exemption applies meaning that capital gains tax is not payable on property that is accepted in lieu of IHT.

Are there any other options?
IHT may be paid on certain transfers of property in ten equal yearly instalments if the relevant election is made. The first instalment will be due on the normal due date for payment of the IHT, for example, in the case of a chargeable transfer made on death, it is payable six months after the end of the month of death. Interest will be payable if the instalment option is taken.

Property to which the instalment option may apply includes:

• Land
• Certain shares or securities
• A business or an interest in a business to the extent of the net value of the business assets

Once the property is sold or transferred any unpaid instalments become due on the date of disposal.

There is a further option to consider with respect to shares. If a share portfolio has been set up with a broker as a nominee account, prior to the death of the individual, in some circumstances, the nomine brokers may agree to sell the shares to fund the IHT bill prior to probate. However, they are not obliged to do this and therefore this option will be dependant on the broker involved.

Mike Warburton, Director at Grant Thornton says: "Inheritance tax can be very difficult to pay on the basis that an initial payment has to be made before probate is granted and the personal representatives do not have the power to sell the assets without a grant of probate, although arrangements can be made to use cash funds held at the bank. Realising funds is further exacerbated in the current climate where assets may be difficult to sell in the open market so serious consideration should be given to finding out whether property might be accepted in lieu, although bear in mind that the offer of the property may not be accepted."

Please contact us if you would like further advice on any of the above.