Advanced Taxation (UK) · Inheritance tax: administration and payment, including the instalment option

Funding IHT and Planning for Payment in ACCA Advanced Taxation

Updated 11 October 2026 · Fact-checked

Funding IHT means finding cash to pay the bill when estate assets are illiquid. Options include the Direct Payment Scheme, estate cash, life assurance written in trust, instalments, and selling assets. Each sale has CGT or income tax effects, so you advise on the cheapest and most practical route for the scenario.

Understand Funding IHT and Planning for Payment

IHT on death is usually the main cash demand on an estate. The estate often holds a house, a business or farmland, not cash. The question is how to find the money, and when.

The key timing problem is that tax on death is due before the executors can normally get a grant of probate. The general due date for death tax is six months after the end of the month of death. In practice, interest on late tax runs from that date. Executors may need money earlier than they can access the estate. This is the liquidity problem.

There are several ways to fund the bill. Executors can use the Direct Payment Scheme, where the deceased's bank or building society releases funds straight to HMRC, up to the tax due. They can also use estate cash after probate, or borrow against the estate. A whole of life policy written in trust pays out outside the estate, so the proceeds do not add to the IHT bill. The trustees, or the terms of the trust, decide who receives the money. The trustees may lend money to the estate or buy assets from it to provide liquidity, but the proceeds are not automatically available to pay the estate's IHT.

The instalment option is available only for the tax attributable to qualifying assets, such as land and buildings, certain unquoted shares and business interests. It does not cover the whole bill. That tax can be paid in ten equal annual instalments. Interest runs on the instalments only for some types of asset, so check which assets are involved.

Selling assets is the last resort. A sale after death uses probate value as the base cost for CGT, because assets are treated as acquired at market value on death. So sale soon after death usually gives little or no gain. Keep the exam focus on this: the sale may be tax-efficient, but it may not suit the family's wishes, for example keeping a family business or farm. Asset income that stops after a sale may also change income tax for beneficiaries.

In ATX you must advise, not just list. Pick the options that fit the facts, give reasons, and quantify tax and cash flow where numbers are given.

Key rules to remember

IHT rate on death: Death tax = 40% × (chargeable estate − available nil rate bands); Nil rate band is £325,000 and residence nil rate band is £175,000 (if available). Both are in the tax tables. Charity-rate conditions, if tested, are not covered here.
Lifetime rate: Lifetime tax on a chargeable transfer = 20% × excess over nil rate band; Lifetime rate is 20%. If the donor dies within seven years, the tax on the transfer is recalculated at the 40% death rate. Taper relief in the tables then reduces that tax. Lifetime tax already paid is credited, but it cannot create a refund.
Taper relief: Reduction in tax: 3-4 years 20%; 4-5 years 40%; 5-6 years 60%; 6-7 years 80%; Taper relief reduces the tax, not the value transferred. It applies only where the transfer exceeds the nil rate band, and it reduces the death tax computed at 40%. Then deduct lifetime tax paid. If lifetime tax was higher, there is no refund.
Due date for tax on death: Six months after the end of the month of death; State the general rule. Interest runs on late tax. The official underpaid rate in the tables is 8.50%.
Base cost on death: CGT base cost of inherited assets = market value at date of death; Gains between death and sale are taxable. CGT rates are 18% and 24%, with annual exempt amount £3,000. Personal representatives have the annual exempt amount only for the tax year of death and the next two tax years.
Interest on tax: Underpaid tax 8.50%; overpaid tax 3.50%; Use the tables supplied. These are the assumed rates.

How to solve Funding IHT and Planning for Payment questions

Use this method for any question asking how an estate can pay IHT or how to plan for payment.

1Identify the IHT bill, who is liable to pay it and when it is due. Note which assets are liquid and which are not.
2Work out how much cash is needed and by when. Remember that payment is due before the grant of probate is normally available.
3List the funding routes that fit the facts: Direct Payment Scheme, estate cash, loans, life assurance in trust, instalment option where available, and asset sales.
4For each route, state the practical advantage and drawback, including interest costs, timing and the family's wishes.
5If assets will be sold, compute the CGT using probate value as the base cost. Use the £3,000 annual exempt amount if the sale falls in the tax year of death or the next two tax years. Apply the correct 18% or 24% rate.
6Consider income tax effects of selling or keeping assets, such as loss of rent or dividends and any tax on income during administration.
7Recommend one or two routes clearly, with figures where possible, and state any assumptions.
8Finish with a short professional conclusion for the client or executors, in the format asked for, such as a letter or email.

Quickest way: Cash gap and cheapest funding

When to use it: Use this when the requirement is short and asks which funding route to recommend.

Write the IHT bill and the cash available on separate lines.
Compute the shortfall.
Start with estate cash released through the Direct Payment Scheme. Then check whether the trustees of any policy in trust can lend to the estate or buy assets from it. The policy proceeds are not automatically available to pay the estate's IHT.
If a shortfall remains, test whether the instalment option applies to the tax on qualifying assets, then consider borrowing and asset sales.
For any sale, compute gain using probate value and CGT at 18% or 24%.
Write a two-line recommendation with the reason.

Common mistakes in Funding IHT and Planning for Payment

Saying executors can always pay IHT from the estate before probate.
Students forget that the bank may freeze accounts until a grant is produced.
Fix: Mention that estate funds may not be accessible and explain the Direct Payment Scheme and borrowing as ways to pay on time.
Using the original cost as the CGT base cost for assets sold after death.
Lifetime CGT rules are on autopilot.
Fix: Use market value at death (probate value). Only the gain after death is taxable.
Including life assurance proceeds in the estate when the policy is written in trust.
Students assume all policies pay to the estate.
Fix: State that proceeds from a policy in trust fall outside the estate, so they do not increase the IHT. The premiums may be gifts, so consider exemptions.
Ignoring interest on late payment.
The focus is on the IHT figure and not on cash flow.
Fix: Mention interest runs from the due date and state the rate in the tables if figures are asked.
Recommending a sale without thinking about the beneficiaries' wishes or lost income.
The tax result looks neat on paper.
Fix: Add one line on non-tax factors, such as keeping the family business, and on the income tax effect of losing the asset's income.

Worked examples

Example 1

Anna dies owning a house worth £600,000, shares worth £150,000 and cash of £50,000. Her estate qualifies for the residence nil rate band of £175,000 in full, and her nil rate band of £325,000 is fully available. There are no debts or exemptions. Compute the IHT payable and state how the executors could access cash to pay it before probate.

Show the solution

Total estate = £600,000 + £150,000 + £50,000 = £800,000.
Available bands = £325,000 + £175,000 = £500,000.
Taxable amount = £800,000 − £500,000 = £300,000.
IHT at 40% = £300,000 × 40% = £120,000.
The cash in the estate is £50,000, which is less than the bill, so more funding is needed.
The executors can ask the bank to pay the £50,000 directly to HMRC under the Direct Payment Scheme. This releases funds from the deceased's account, up to the tax due, without needing probate first.
The remaining £70,000 could come from a loan, or from selling the shares after probate, using the date-of-death value as base cost.
Selling after probate may happen after the due date, which is six months after the end of the month of death. Interest at 8.50% could then run on the unpaid balance. So the executors should borrow, or sell the shares promptly.

Answer: IHT payable is £120,000. Use the Direct Payment Scheme for the £50,000 cash, then borrow or sell assets promptly for the remaining £70,000, as interest at 8.50% could run on any balance unpaid after the due date.

Example 2

Following the death above, the executors sell all the shares for £165,000 within the tax year of death or the following two tax years. Their probate value was £150,000. Assume there are no selling costs. Personal representatives have an annual exempt amount of £3,000 for the tax year of death and the next two tax years, and their CGT rate is 24%. Compute the CGT, then state the net cash available toward the IHT bill.

Show the solution

The sale falls within the period in which personal representatives have the annual exempt amount, so £3,000 is available. The rate is 24%.
Gain = £165,000 − £150,000 = £15,000.
Less annual exempt amount £3,000, giving taxable gain of £12,000.
CGT = £12,000 × 24% = £2,880.
Net cash = £165,000 − £2,880 = £162,120.
The remaining IHT gap of £70,000 is therefore covered, even before using the £50,000 estate cash if that is applied elsewhere.

Answer: CGT is £2,880. Net proceeds are £162,120, which is enough to cover the £70,000 remaining IHT. The base cost is probate value, so only the £15,000 increase after death is taxed.

Exam tips

Answer the exact requirement. If asked how to fund IHT, list practical sources and rank them, not just the rules on rates.
Use the tax tables for the nil rate band, residence nil rate band, CGT rates and interest rates. Do not rely on memory.
Always link sales of assets to CGT with probate value as the base cost.
Add a line on life assurance in trust where advice on future planning is asked. Explain why it stays outside the estate.
Earn professional skills marks with a clear structure, a recommendation and sensible commercial points.

Practice questions from Inheritance tax: administration and payment, including the instalment option

Funding IHT and Planning for Payment: frequently asked questions

How do I pay inheritance tax before probate?

The Direct Payment Scheme lets executors ask banks and building societies to pay IHT straight to HMRC from the deceased's accounts. Executors can also borrow, or use other funds. This helps because the grant may not be available when the tax is due.

Why put a whole of life policy in trust?

A policy written in trust pays out outside the estate, so it does not increase the IHT bill. The trustees, or the terms of the trust, decide who gets the money. The trustees may lend to the estate or buy assets from it, but the proceeds do not automatically pay the estate's IHT.

What is the CGT position if the executors sell an asset after death?

The asset is treated as acquired at market value on death. Only the gain after death is taxable. Executors have the annual exempt amount for the tax year of death and the next two tax years, and the CGT rates in the tax tables apply.

Do I need to compute interest in an ATX question on funding IHT?

Only if the facts give dates or ask for it. Use the interest rates in the tables for underpaid and overpaid tax. Otherwise, mention that late payment attracts interest.