When it comes to paying inheritance tax, timing is critical. The tax must be paid within six months of the deceased’s death to avoid interest charges.
However, it can take much longer to sell inherited assets or finalise the estate. This is where a bridging loan can be particularly useful to provide a short-term loan to pay your inheritance tax bill.
How It Works
Get the money fast – Bridging loans provide quick access to cash, allowing you to pay the inheritance tax promptly and avoid penalties or interest charges.
Security – Just like with any other mortgage type, a lender will require security. A bridging loan to pay inheritance tax is usually secured against the property you have inherited or another property you own such as your main residence.
Repayment – The loan is typically repaid once the property is sold or when other funds become available, such as from the sale of other assets in the estate. Bridging loans are designed to be short-term solutions, with repayment periods ranging from a few months to a couple of years, providing you plenty of time to get your sale organised.
Benefits of Using a Bridging Loan to Pay Inheritance Tax
Speed – Bridging loans can be arranged much faster than traditional mortgages, often within a couple of weeks. This is crucial when dealing with time-sensitive obligations like inheritance tax. Immediate access to funds can help you settle your inheritance tax payment quickly, avoiding penalties and interest charges that can accrue over time.
Flexibility – These loans can be used for various purposes, including paying inheritance tax, and are not restricted to property purchases. This makes them a versatile short-term financing solution. Whether you need to cover the inheritance tax or other estate-related expenses, bridging loans offer the flexibility to meet your financial needs.
Avoid a Rushed Price – By using a bridging loan, you may avoid selling assets at a lower price due to time constraints. This can be particularly beneficial if the market is unfavourable. For instance, if the property market is down, you might be forced to sell an inherited property for less than its true value. A bridging loan allows you to hold onto the asset until the market improves.
Time – Instead of liquidating assets at potentially low prices to cover the tax, a bridging loan lets you maintain the estate’s overall value. This approach can lead to a better financial outcome in the long term as it gives you time to make more strategic decisions regarding the estate.
Convenient Repayment Options – Bridging loans often come with various repayment options, making it easier to tailor the loan to your specific financial situation. Whether you plan to repay the loan through the sale of the inherited property or another asset, or by securing long-term financing via a remortgage, bridging loans provide the necessary flexibility.
Speak to a Bridging Specialist
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Considerations and Risks
While bridging loans to pay inheritance tax offers several benefits, there are also important considerations and potential risks to be aware of:
Higher Interest Rates – Bridging loans generally come with higher interest rates compared to traditional mortgages. It’s essential to calculate the total cost of the loan and ensure it’s a financially viable option. The convenience and speed of a bridging loan come at a price, so it’s crucial to understand the financial implications fully.
Fees and Charges – Be aware of additional costs such as arrangement fees, valuation fees, and legal fees. These can add up and should be factored into your decision. It’s important to get a clear understanding of all associated costs before proceeding with a bridging loan to avoid any surprises.
Repayment Risk – Ensure you have a clear exit strategy for repaying the loan. This could be from the sale of the inherited property, or other assets, or securing a longer-term financing option. Without a solid repayment plan, you risk financial strain or even defaulting on the loan, which could lead to losing the secured property.
Short-Term Nature – Bridging loans are designed to be short-term solutions, typically ranging from a few months to a couple of years. If the estate takes longer to settle than anticipated, you might face pressure to repay the loan sooner than is feasible. It’s important to align the loan term with your expected timeline for settling the estate.
Impact on Credit Rating – Taking out a bridging loan and any potential delays in repayment can impact your credit rating. It’s vital to consider how this loan will fit into your overall financial situation and to ensure you can meet the repayment terms to protect your credit score.
How to Apply for a Bridging Loan to Pay Inheritance Tax
If you decide that a bridging loan is the right solution for paying your inheritance tax, follow these steps:
Seek Professional Advice – Not all mortgage brokers can offer bridging loans in-house, so it’s essential to find those who specialise in this type of financing. Look for a mortgage broker with a good reputation and a free, no-obligation consultation. They can help you navigate the application process and find the best terms.
Prepare Documentation – Lenders will require detailed information about the property being used as security, the estate, and your financial situation. Gather documents such as property valuations, proof of inheritance, and details of any outstanding mortgages.
Find a Conveyancer – Again, you will need to look for a conveyancer who can deal with your bridging loan lender and one who can act quickly. Our mortgage broker team will help you with this if you do not have an existing relationship in place.
Submit Your Application – Once you have received a recommendation as to which lender is best for your situation and prepared your documentation, your broker will submit your application. The lender will assess your eligibility and provide an offer if you meet their criteria.
Receive Funds – If approved, you can receive the funds quickly, often within a couple of weeks. Use these funds to pay your inheritance tax promptly and avoid any penalties or interest charges.
The Importance of Bridging Loan Advice
Using a bridging loan to pay inheritance tax can be an effective solution for those who need immediate funds. While there are benefits, such as speed and flexibility, it’s essential to consider the higher interest rates and additional fees.
Ensure you have a solid repayment plan in place to avoid any financial pitfalls. Always seek professional mortgage advice to determine the best course of action for your specific circumstances.
Here at UK Moneyman, we specialise in all kinds of mortgages including bridging loans, therefore, we can help with all customer situations.
There are unlikely to be very many advisors in the UK with Wayne’s wealth of experience. Having joined Nationwide as a Trainee Manager in 1983, he has gone on to perform a wide range of Management and Business Development roles with a number of prominent UK Building Societies and Mortgage Companies and has been a regular contributor of articles and TV/Radio comment.
He continues to advise right across the spectrum from young first time buyers, landlords and to clients in the later stages of life. Whatever the age of the client, he embodies UK Moneyman’s commitment to find the right deal for any customer’s needs and priorities.
Outside work, Wayne is a keen follower of rugby league and spends a lot of time chasing his grandchildren around!
