Can Inheritance Tax Be Paid from the Estate? A Practical Guide for UK Families and Executors

One of the most common and practical concerns faced by executors and beneficiaries is this:

“Who pays the inheritance tax — and does it come out of the estate itself?”

At Belgravia Capital Wealth Management, we frequently help families navigate this exact issue.

The good news is: yes - inheritance tax (IHT) is typically paid from the estate, not by the beneficiaries themselves.

But like many aspects of estate planning and administration, the real answer is nuanced.

In this comprehensive guide, we’ll explore:

• When IHT is paid from the estate

• Who is responsible for paying it

• How the tax is calculated

• Which assets can be used to settle the bill

• Exceptions where beneficiaries may have to contribute

• What happens if there isn’t enough cash in the estate

What Is Inheritance Tax and When Is It Due?

Inheritance Tax is a charge on the value of a deceased person’s estate - their property, possessions, investments, and savings - above certain tax-free thresholds.

As of 2025:

• £325,000 Nil-Rate Band (NRB) per person

• £175,000 Residence Nil-Rate Band (RNRB) if passing a main home to direct descendants

• Combined, a couple can pass on up to £1 million tax-free

• 40% tax applies on the value above these thresholds

IHT is usually due within 6 months of the end of the month of death. After that, interest begins to accrue on unpaid amounts.

So, Can Inheritance Tax Be Paid from the Estate?

Yes - in the vast majority of cases, Inheritance Tax is paid directly out of the estate before any money or assets are distributed to the beneficiaries.

In legal terms, this is called the “grossing-up” method, where:

• The estate value is calculated

• IHT is assessed on that value

• The tax is paid using cash from the estate

• Only the remaining assets are passed to the beneficiaries

This means beneficiaries usually receive their inheritance net of tax - they don’t have to pay HMRC directly.

Who Is Responsible for Paying IHT?

The responsibility to pay IHT lies with the executor (if there is a will) or the administrator (if there isn’t).

Their duties include:

• Valuing the estate

• Submitting IHT forms to HMRC (usually IHT400 or IHT205)

• Arranging payment of the tax

• Applying for probate (or letters of administration)

• Distributing the estate

They may use:

• Cash held in the deceased’s accounts

• Proceeds from selling assets

• Life insurance payouts

• Dedicated funds set aside for tax

How Is the IHT Actually Paid?

The executor or solicitor handling the estate can:

• Request direct payment from the deceased’s bank accounts using the HMRC “Direct Payment Scheme” (DPS)

• Use cash already in the estate

• Sell property, shares, or other assets to raise funds

• Pay the tax personally and reclaim it from the estate later

HMRC has arrangements with most major UK banks to release funds for IHT before probate is granted — allowing tax to be paid before full access to the estate.

What If the Estate Includes a Property or Business?

If the estate is mostly illiquid (e.g. property, land, business shares), IHT can be:

• Deferred and paid in instalments over 10 years

• Paid in part upfront (usually 10% per year)

• Accelerated if the asset is later sold

This is covered under Sections 227–232 of the Inheritance Tax Act 1984 and applies to:

• Land and buildings

• Business assets

• Unlisted shares

While this can reduce immediate pressure, interest is charged on the outstanding balance - currently at 7.75% (as of 2025).

When Do Beneficiaries Pay the IHT Instead?

While the estate usually covers the bill, there are important exceptions where beneficiaries may be responsible for paying IHT themselves:

1. Gifts Made in the 7 Years Before Death

If the deceased made large gifts and didn’t survive 7 years, the recipient may owe IHT — particularly if:

• The estate cannot cover the tax

• The gift exceeded the nil-rate band

This is known as Potentially Exempt Transfers (PETs).

2. Chargeable Lifetime Transfers (CLTs) into Trust

If the deceased made a gift into a trust in the 7 years before death, the trustees or recipients of the trust may owe tax.

3. When a Will Specifies a Net Inheritance

If the will states that a gift is made “free of tax,” then the tax must still be paid — but from the estate.

If it states the gift is “subject to tax,” then the beneficiary may receive a smaller amount after the tax is deducted.

This is why clear wording in wills is so important.

What Happens If There Isn’t Enough Cash in the Estate to pay the Inheritance Tax Bill?

This is a common challenge - particularly when the estate consists largely of property or private company shares.

In such cases, the executor has several options:

1. Sell assets to raise funds

2. Pay the IHT in instalments

3. Borrow funds (sometimes through short-term estate loans)

4. Ask beneficiaries to contribute or lend money temporarily

5. Use proceeds from a life insurance policy written in trust

It’s essential to act early and plan well - delays can result in interest charges and probate delays.

Does Life Insurance Help Pay IHT from the Estate?

Yes - but only if it’s written in trust.

Life insurance policies not written in trust are part of the taxable estate, and the proceeds may increase the IHT bill.

However, if written in trust:

• The payout is made outside the estate

• It can be accessed before probate

• It can be used to pay the IHT bill directly

This is one of the most effective tools in estate liquidity planning.

Can IHT Be Paid Before Probate Is Granted?

Yes. In fact, in most cases, IHT must be paid before probate is issued.

HMRC offers the Direct Payment Scheme, where banks can release funds directly to pay tax without waiting for probate.

If full payment is not possible:

• HMRC may grant a limited “clearance” for probate to proceed

• The executor can still begin administration while arranging to settle the balance

What If No One Pays the IHT?

If IHT is due and not paid:

• HMRC will charge interest

• Probate or letters of administration may be delayed

• The executor or administrator may be held personally liable

• In extreme cases, HMRC can pursue court action or asset seizures

This is why careful planning - and working with professionals - is critical.

Summary: Who Pays IHT, and Where Does the Money Come From?

In a typical estate with a will, the executor is responsible for paying the inheritance tax (IHT), and the payment comes from the estate itself.

However, if a gift was made within the 7 years before death, the recipient of that gift may be liable for paying the IHT from their own funds, especially if the estate doesn’t have enough to cover the tax.

In the case of gifts into a trust, the trustees are responsible for settling the IHT, using the assets within the trust.

Similarly, if there is a life insurance policy written in trust, the trustees will pay the IHT using the proceeds of that policy.

If there’s not enough cash in the estate to cover the IHT, the executor or beneficiaries must arrange to pay the tax, which might involve selling assets, taking out loans, or paying the tax in instalments.

Tips in dealing with HMRC regarding IHT for Executors and Families

• Use professional valuations to get an accurate estate value

• Act early — don’t wait until the 6-month deadline approaches

• Consider a life insurance policy in trust to cover expected IHT

• Review the will carefully for tax-specific clauses

• Work with a probate solicitor or wealth adviser for complex estates

How Belgravia Capital Wealth Management Can Help you Plan for Inheritance Tax

We support executors and families with:

• Estate valuation and IHT calculation

• Completing IHT400 and supplementary forms

• Liaising with HMRC and solicitors

• Managing cash flow and liquidity issues

• Planning for IHT before and after death

Whether you’re administering an estate or planning your own, we ensure inheritance tax doesn’t create unnecessary stress or delays.

Conclusion: Can Inheritance Tax Be Paid from the Estate?

Yes - in most cases, inheritance tax is paid directly from the estate, before beneficiaries receive their share.

However, the executor must act swiftly, value the estate correctly, and ensure funds are available - or arrange for assets to be sold or IHT paid in instalments.

With careful planning and expert guidance, you can ensure that IHT is handled smoothly and fairly, without burdening your loved ones.

Contact Belgravia Capital Wealth Management at contact@belgraviacapital.co.uk for expert support in estate administration and inheritance tax planning.