Passing wealth down through the generations is a top priority for many of the UK’s citizens, and a major challenge to this is the Inheritance Tax that is due when an individual passes away. The executors of an estate must act quickly to ensure that the tax is paid within the allotted timeframe, and may find it difficult to do so; in these situations, bridging finance can be an invaluable solution that enables a family to retain cherished possessions and assets.
As with all financial products a bridging loan for inheritance tax must be repaid (with interest); if the loan is not repaid in full, the assets against which the loan is secured may be repossessed instead. While a bridging loan may well be the solution to many issues that confront an estate’s executors it’s important to consult a financial advisor before committing to this form of finance.
Bridging finance is ideally suited to meet the needs of an inheritance tax bill because it is a highly flexible and adaptable form of finance. Before considering how it can help, we must first examine the requirements that inheritance tax places on individuals, which will highlight how helpful bridging finance can be.
UK Inheritance Tax is levied on the value of an estate over £325,000 (rising to £425,000 if your home is passed to your children). This means that any estate worth more than this will be charged at a rate of 40%, levied on the value above the threshold. This can result in a hefty bill, even for estates which would not be considered particularly high-value: for instance, a house with a value of £350,000, two cars of £10,000 each and £30,000 in savings would total £400,000, requiring a tax bill of £30,000. This is not a huge estate, and would be typical of many middle-class retirees; for higher-value estates, tax bills can grow extremely large. For example, if an estate consists of an £800,000 home plus another £100,000 in assets, inheritance tax will present a whopping bill of £230,000.
The main pressure that this puts on large estates is the need to liquidate assets. While a smaller estate may be able to produce the £30,000 necessary to meet the tax bill without selling off a property, it’s very difficult for even a rich family to raise £230,000 in capital within the 6 months required by the UK Government. In many cases, the only way to acquire this amount of cash is to sell off family assets, usually by putting the house up for sale.
The high value of some inheritance tax bills can require an estate to be liquidated quickly. Unfortunately, this can sometimes necessitate the selling-off of assets at less than market value; if a home has to be sold in a short space of time, sellers often have to compromise by accepting a low bid. As anyone who’s sold a house will know, 6 months is not necessarily long enough to reliably complete a sale, and if the transaction should fall through at any point then there’s no way to pay off the inheritance tax.
Bridging finance provides valuable options to an estate’s executors, because it can be used to create a little breathing room while long-term finances are arranged. A bridging loan is commonly used to create a financial “bridge” between the payment of a debt and the long-term financial solution which would usually be used to pay it. In this case bridging finance may be used to quickly resolve an inheritance tax bill whilst the arrangement of an estate is completed.
Bridging finance allows an estate’s executors a great deal of flexibility in how they pay off their inheritance tax bill, because it provides them with the option to finance this tax without immediately selling off any assets. For instance, a bridging loan could be secured on the estate immediately for the purposes of resolving inheritance taxes, and the estate could then be sold off without the pressures of needing a quick sale. Alternatively it might be possible for the executors to source funds from long-term savings such as bonds, or the sale of stocks and shares. Using a bridging loan to temporarily cover the gap while these finances are put in place allows the executors to avoid dismantling an estate simply to meet inheritance bills.
Bridging loans are high-value, short-term loans secured against an asset through either a first or second charge. This makes them highly flexible and ideally suited to resolving inheritance tax issues because they may be arranged quickly and easily, and secured against a wide variety of different assets. When resolving an estate there are many different assets which might be used as security deposits for a bridging loan, which gives executors the flexibility they need to pay off the various necessary bills involved.
Although most bridging lenders prefer to receive “first charge” security on their loans, some lenders will also accept assets that have already been financed. Known as a “second charge”, assets which are already subject to finance may include houses under mortgage or cars purchased under lease agreements. The ability to use these assets as collateral is highly valuable when resolving an estate, because the many different claims must all be resolved; by consolidating these costs with the use of bridging finance, executors can quickly streamline an estate’s resolution.
By using bridging finance, it’s possible for executors to make the process of arranging an estate quick and straightforward, and to minimise the impact this has on their legacy. Because bridging finance can play such a useful role in meeting inheritance tax bills, it should be considered as an option whenever an inheritance tax bill must be met.
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