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I would like to leave my house to my grandson but as it stands at the moment financially he would not be able to pay the inheritance tax.

I would not like for the house to be sold in the long run as he has children however I see no other way around it.

My house at the moment is valued between £825,000 and £1million. Have you any suggestions on how to keep the house in the family?Heather Rogers replies: One of the most common issues that can arise when someone dies is that they have lots of assets but very little cash.

If the value of the estate, even after applying the deceased person’s personal reliefs plus any transfers of relief from a late spouse (see the box below), still leaves an inheritance tax liability then this bill has to be funded from outside the estate.

This can cause a financial headache for the person dealing with the estate, as it means money must be found to pay the inheritance tax bill before probate is granted and the deceased person’s assets are released.

But there are options available to deal with this problem both to you now and to the eventual personal representative of your estate, who is usually an executor and/or the person applying for the grant of probate.

These are explained below, along with what else you might consider before deciding how you want to pass on your property, to which you are evidently attached.

How do you find the money to pay inheritance tax upfront?

Personal representatives can pay inheritance tax personally by way of a loan to the estate and claim it back, once the assets are sold.

They can also apply for a loan to pay it using the assets of the deceased’s estate as security. Anyone doing this should take professional advice first, including on interest rates.

It is also possible for individuals, while they are alive, to take out an insurance policy to cover the cost of paying for inheritance tax, if they believe that their estate will be liable.

Assistance should be sought from a financial adviser on how best to do this, and on the cost and affordability of the policy premiums. Your age at the time will be a factor.

When does inheritance tax have to be paid?

It must be paid at the end of the sixth month after the person died. However, it is possible to pay inheritance tax in instalments if the estate comprises:

  • Property
  • Unlisted shares/securities
  • Listed shares and securities
  • Business interests.

In this case, the inheritance tax must be paid in 10 annual instalments, with the first due at the end of the sixth month after the deceased’s death.

Interest is not charged on the first instalment but on later instalments. Interest is charged on the total value of the outstanding tax as well as on any instalments that are not paid on time.

Furthermore, if the asset which allows the inheritance tax to be paid in instalments is sold (for example, a house or shares) then the full outstanding balance of the tax must be paid.

Note that obtaining the grant of probate can be trickier in these circumstances, so speak to a solicitor first.

Inheritance tax can also be paid in instalments if paying in one lump can be shown to cause financial hardship.

What happens if you gift your house in your lifetime?

There would be a capital gains tax charge on the transfer, and also inheritance tax might still be payable if you continued to benefit from the property.

This is called a ‘gift with reservation of benefit’ which would negate the gift, meaning it remains in your estate for inheritance tax purposes.

What else should you consider before leaving assets to your grandson?

Passing on assets to grandchildren is a good inheritance tax planning measure, as it removes these assets from the estate of their parents.

Adult children might already have assets of their own which when passed on may give rise to an inheritance tax charge on their estate.

By leaving your home to your grandson he would be able to claim the ‘residence nil rate band’ relief of £175,000 on inheritance tax because he is one of your direct descendants, in addition to the ‘nil rate band’ relief of £325,000.

If you previously inherited a former spouse’s allowances as well, together these would total £1million.

Therefore, if your property is your only real asset your grandson might not have to pay inheritance tax at all under the rules as they currently stand.

You should also consider your own needs. You may need your property yourself to fund care fees, or you may wish to downsize at a later date for health or financial reasons.

If you tie up the property as a guaranteed inheritance, this may cause you issues later.

The easiest option if your grandson is your main or only beneficiary is to leave the appropriate percentage of your estate to him, and then if he wishes to keep the property when he inherits he can do so.