Inheritance tax: what happens to your estate when you die? Can executors sell your rental property?

Let’s talk about death. It is not something any of us really wants to dwell on, of course, but, with the majority of their wealth tied up in property, landlords need to address their own demise unless they want to leave their loved ones in a right financial pickle.

I only discovered recently, following the sudden death of a relative, how cruel the UK taxation system is when someone dies.

For instance, did you know that in order for your executors — those you name in your will to divvy up your estate when you die — to be allowed to sell your property, they need to apply for a grant of probate, but they can’t get a grant until they’ve paid any inheritance tax due on your estate?

As your executors wouldn’t be able to sell your rental property before paying the tax, this could mean they would have to take out a hefty loan to cover what’s due.

After gaining probate, it could be months, maybe years before they would be able to pay off the loan because of the time it could take to sell your rental property.

Also, your executors might have to shell out up to £6,000 in fees, depending on the size of your estate, just to apply for probate, as the Government has just announced a new sliding scale of probate charges to replace the current £215 flat fee.

Of course, not everyone will have to pay inheritance tax, and in fact the vast majority of estates are exempt.

You can leave everything to a spouse free of inheritance tax and you get a £325,000 tax-free allowance when you die, plus up to £125,000 extra if your estate includes a family home, as long as you leave it to your children.

If you’re a widow or widower and you inherited your late spouse’s entire estate, you can also claim their tax-free allowance, meaning you could leave up to £900,000 tax free.

But if you own rental property, there’s a strong possibility that your estate is large enough to incur inheritance tax, which is a whopping 40 per cent of anything over the tax-free threshold. So, what can you do to make sure your executors can afford to pay the tax and probate fees?

One option is to keep enough cash in the bank to cover the tax liability on your estate, as banks can make direct payments to the tax office, though this might not be realistic for asset-rich, cash-poor landlords. It certainly isn’t something I could manage.

A more realistic option is to take out a “whole of life” insurance policy for at least as much as your tax liability, as insurance companies are able to release money to pay inheritance tax bills before probate has been granted.

Nick Earl, of independent financial advisers London Money, suggests you have a plan that can be revised every so often to make sure it will cover your tax liability.

Also, make sure it’s put into a trust so that it isn’t added to the taxable value of your estate. This, says Earl, is easy to do.

A third option is to make sure you have a sizeable pot in a pension scheme as this will be paid to your beneficiaries if you die before you retire.

Trustees of workplace pensions are allowed to pay the money directly to a member’s beneficiaries before probate is granted, especially if there is any financial hardship.

Sorry, it’s a grim subject. But it will be even grimmer for your family if you don’t consider now how they will cope financially when you pop your clogs.

Victoria Whitlock lets four properties in south London. To contact Victoria with your ideas or views, tweet @vicwhitlock.