Sonia's £196,000 in BBC’s EastEnders is fiction... but Inheritance Tax is REAL for millions

By Jeff Prestridge, Financial Mail on Sunday

Inheritance tax divides opinion. Some believe it should be abolished because it is a form of double taxation. Others argue it is only paid by the rich who can afford it – and so it is justified. But where views converge is on how the tax is gathered by His Majesty's Revenue & Customs.

Who Pays Inheritance Tax?

Everyone – be they tax experts or those responsible for dealing with the estate of someone who has died – agrees that the system is unfair and ripe for reform.

Why? It's because the tax is demanded before the executor or person administering the estate is given authority (grant of probate) to sell the assets that are part of it.

Through a combination of a freezing of the tax threshold at £325,000 since 2009 and rising house prices, a record number of estates are being dragged into inheritance tax territory.

As a result, more executors are being landed with bills they cannot pay in the permitted time. Furthermore, they are then charged interest on the outstanding tax.

It's an issue that the scriptwriters of EastEnders have picked up on. When Dot Cotton, one of the BBC soap's most popular characters, died last year after the death of June Brown (the wonderful actress who played her), step-grand-daughter Sonia Fowler stepped into the breach to sort out the funeral.

She inherited Dot's home in the fictitious Walford, part of London's East End. But what Sonia didn't realise is that it would trigger a £196,000 tax bill.

When she received the confirmation letter, she was left wondering whether she would have to sell the house to pay the bill, leaving her homeless (the story is ongoing).

One person with strong views on the subject is Alan Miller, founder of wealth manager SCM Direct.

He believes inheritance tax is double taxation and should be abolished. But his main gripe is about how the tax is collected.

He says: 'While some might say the Government needs all the money it can get from inheritance tax, the system for collecting it is both morally and intellectually bankrupt.

'Rather than an individual benefiting financially when someone close to them passes on and gives assets to them, they can find themselves materially worse off for some considerable time. Countless politicians and numerous tax experts recognise that the tax needs urgent reform, but nothing changes.'

He adds: 'In 1789, American statesman Benjamin Franklin said, 'Our new constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.'

'Well, in the UK it seems that nothing is more uncertain and more unfair than the UK's system of death taxes.'

When someone dies, their estate (comprising their property, possessions and assets) is potentially liable to inheritance tax at 40 per cent. But there are allowances to mitigate the tax bill.

The first £325,000 of an estate (the nil rate band) is exempt from tax. There is an additional resident nil rate band of £175,000 if the family home is gifted to children or grandchildren, although this reduces on estates worth more than £2 million.

For couples, any unused nil rate band when the first person dies can be transferred to the survivor, potentially boosting the nil rate band to £650,000. The same applies to the resident nil rate band. So for couples, up to £1 million of their estate can escape inheritance tax.

Around one in 20 estates is liable to inheritance tax. But the tax grab is increasing and more estates are being sucked into paying.

Last year, between April and December, £5.3 billion was collected in inheritance tax by Revenue & Customs – £700 million more than in the same period a year before.

With the Government having already said that both the current nil rate and resident nil rate bands will be frozen until at least April 2028, the tax take is only going one way. Up... and up.

All rather depressing. But there are a number of legal steps someone can take during their life to ensure any inheritance tax is kept to a minimum. These include a number of gift allowances.

For example, £3,000 can be gifted every year free of inheritance tax while bigger gifts can be made that are tax free provided you then live for another seven years.

Yet, an inheritance tax bill is not the only sting in the tail for an executor presiding over an estate. It's when the tax must be paid. Executors can find themselves taking on an unexpected financial burden.

This is because the tax must be paid on most assets other than houses before Revenue & Customs will issue a grant of probate (in Scotland, this is called confirmation). A grant of probate is the document that allows the proceeds from the estate to be distributed to the beneficiaries. No tax payment, no grant of probate.

Delays of up to five months in both Revenue & Customs processing paperwork from executors and in granting probate have exacerbated the problem. Some executors do not have the financial wherewithal to pay this tax bill and are forced to take out expensive short-term loans (bridging loans) to cover it.

If the tax is not paid by the end of the sixth month after the person's death, Revenue & Customs starts charging interest at six per cent per annum. In the taxman's defence, it does allow any inheritance tax due on a property to be paid in instalments. But the outstanding amount will still attract interest.

Alan Miller is perplexed by the whole system. 'Have you ever heard of a tax that must be paid on a cash sum or an asset before you have received it? It's madness.'

It is indeed. Time for reform.