Spring Budget: Grants on credit

The requirement is: “From 1 April 2024, personal representatives of estates will no longer need to have sought commercial loans to pay inheritance tax before applying to obtain a “grant on credit” from HMRC”.

As a recap, the personal representatives (PRs) are required to pay all or part of the inheritance tax (IHT) before they can obtain a grant and realise assets. This can lead to situations where there's an estate that gives rise to an IHT charge but does not have sufficient liquid assets to settle the outstanding balance of tax. This is often seen in estates with a large proportion of immovable assets such as land or directly held shareholdings.

Commercial lenders can finance the IHT loan, but if that’s not possible, PRs can make an application for HMRC to issue a grant on credit. If HMRC allows the grant on credit (usually ensuring that sufficient security exists by way of undertakings or charges over property) the collection of the IHT is postponed until after the grant has been issued. This allows the PRs to realise assets to settle the IHT liability.

At present, to obtain a grant on credit, PRs must demonstrate that they:

• Find it impossible to raise all the funds needed to pay the tax due
• Can demonstrate that they have made every practical effort to raise the money

“Every practical effort” covers multiple areas, but it is where PRs will usually turn to private lenders, making inquiries about commercial loans to settle the inheritance tax. This budget has removed the requirement to approach commercial lenders.

I spoke to James Emery, director of Level, who are one of the market leaders for inheritance tax loans and litigation funding. His perspective sheds light on the potential impact:

“There’s a danger that this will further delay probate if HMRC are unable to respond to applications for a grant on credit far more quickly than they have demonstrated with all things probate in recent years.  With specialist commercial lenders there is an inherent level of urgency to ensure that the very best service levels are provided to ensure further inquiries and good reviews. The appetite for specialist commercial lending solutions has been proven since their launch in 2020, and this will likely only marginally impact the inheritance loan products within the wider probate lending portfolios, and ultimately not where there is urgency to the completion of the probate process and ultimately distribution of the estate.”

James’ cautionary note highlights a critical aspect: timeliness.

My current experience is that HMRC has already been causing delays with either slow or a complete failure to issue an IHT421 at the end of last year. Even now that IHT421s are no longer required, the delays at HMRC have been poor whilst they get used to the new process of issuing reference numbers. After I wrote about the probate delays late last year, the cause of the delays seems to have developed into a back-and-forth between the Probate Registry and HMRC, with both bodies struggling to work together.

Adding a further burden to HMRC raises valid concerns about timely processing.

The cynic in me has noticed another point – interest on unpaid IHT. With the rate currently at 7.75%, HMRC stands to benefit from any delays. The need to pay IHT upfront ensures that IHT is paid in a timely manner and minimises interest payable. 

If PRs can obtain a grant without payment of tax, and without the additional obligation of repaying commercial lending, it’s foreseeable that the payment of IHT could be delayed, significant interest on unpaid IHT could accrue. The longer the process takes, the more lucrative it becomes for the revenue.

In summary, this change opens doors for PRs, but it also places trust in HMRC’s efficiency. Time will tell if that trust is well placed.