Can Inheritance Tax Be Paid from the Estate? Understanding Who Pays and How It’s Funded

Belgravia Capital
May 31
4 min read

When someone passes away, one of the first questions their family, or the executor, must face is:

“Who pays the inheritance tax, and can it be paid from the estate?”

The answer is: Yes - in most cases, inheritance tax (IHT) is paid directly from the estate before anything is distributed to beneficiaries.

But there are exceptions, conditions, and risks that are important to understand.

At Belgravia Capital Wealth Management, we guide families through the complexities of estate administration, helping ensure IHT is paid efficiently and fairly.

In this guide, we explain when IHT is paid from the estate, who is responsible for paying it, and how to make sure it doesn’t cause delays or forced asset sales.

Who Is Responsible for Paying Inheritance Tax?

In most cases, the executor (if there is a will) or the administrator (if not) is legally responsible for:

Calculating the IHT due
Reporting the value of the estate to HMRC
Ensuring the tax is paid on time

They must do this before distributing the estate to beneficiaries.

Can the Tax Be Paid Using Estate Funds?

Yes - inheritance tax is typically paid from:

Cash in the deceased’s bank accounts
Proceeds from selling assets
Liquid investments
Insurance policies (if not in trust)

The tax is paid before beneficiaries receive their inheritance. This is known as a “deduction at source”.

What If the Estate Doesn’t Have Enough Cash to Cover the IHT bill?

If the estate is asset-rich but cash-poor (e.g. it includes property or a business but little liquidity), the executor may need to:

Sell assets to raise funds
Apply to pay in installments (on qualifying assets like property)
Use the Direct Payment Scheme
Use a life insurance policy (if applicable)

Each of these routes has different timeframes, risks, and requirements.

What Is the Direct Payment Scheme (DPS)?

HMRC’s Direct Payment Scheme allows the executor to pay IHT directly from the deceased’s bank or building society accounts - before probate is granted.

Here’s how it works:

The executor submits form IHT423 to the relevant bank
The bank pays HMRC directly from the account
Any remaining funds are released once probate is granted

This method is fast and avoids the need for the executor to front the tax personally.

When Must Inheritance Tax Be Paid?

IHT is due:

6 months after the end of the month of death
For example, if someone dies in January, IHT is due by 31 July

After this, interest accrues on any unpaid tax - even if probate hasn’t been granted.

This makes early valuation and planning critical.

Can Beneficiaries Be Made to Pay the Inheritance Tax?

Usually, no - IHT is paid from the estate before distributions.

However, beneficiaries may be personally liable for tax if:

They received a lifetime gift that falls within the 7-year rule and the estate cannot cover the tax
The gift exceeds the available nil-rate band and the donor dies within 7 years
The gift was not covered by any exemptions

In these cases, the beneficiary pays the tax on the gift.

What If There’s a Will vs. No Will when paying IHT?

If there is a will, the executor pays IHT from estate funds and distributes the net estate as directed.
If there is no will, the administrator still pays IHT from the estate, and assets are distributed according to intestacy rules.

The IHT treatment is the same either way - though the process may be slower without a will.

How to Prevent Forced Sales of Property or Businesses

To avoid having to sell a family home or business just to pay IHT:

Use a whole-of-life insurance policy in trust to cover the liability
Plan lifetime gifting strategies
Explore Business Relief or Agricultural Relief
Structure the estate to include more liquidity

This planning is especially important for high-value estates tied up in illiquid assets.

What Happens If Inheritance Tax Isn’t Paid on Time?

Interest begins to accrue after the 6-month deadline
HMRC may impose penalties for late payment or underreporting
Probate may be delayed, which can hold up the entire estate administration

Executors are personally liable if they distribute assets before settling tax, so it’s crucial to get valuations and liabilities right early on.

How Belgravia Capital Wealth Management Can Help with IHT Planning and Administration

We help executors and families:

Value estates accurately
Calculate and report IHT to HMRC
Use the Direct Payment Scheme or installment options
Avoid forced asset sales
Plan estate liquidity and structure to reduce tax exposure

Whether you’re dealing with probate now or planning ahead, we offer personalised guidance to protect your estate and family.

Conclusion: Can Inheritance Tax Be Paid from the Estate?

Yes - inheritance tax is almost always paid directly from the estate before distributions are made.

But the key is ensuring there’s enough liquidity, accurate valuations, and timely action - otherwise, the process can become stressful and costly.

Need help managing an estate or planning for your own?