How Dot Cotton’s Estate highlighted the real-life challenges of Inheritance Tax

The storyline began when Dot Cotton, a beloved character on the show, passed away, leaving behind a property that she had bequeathed to her step-granddaughter, Sonia Fowler. However, when Sonia received the news that she had inherited the property, she was also informed that she would need to pay £196,000 in IHT.

Sonia was left stunned by the news that she had to pay such a large amount of tax on her inheritance. She was already struggling to make ends meet, and the idea of having to pay such a hefty sum was overwhelming. The storyline brought attention to the fact that inheritance tax can be a significant burden for many people, particularly those who are already struggling financially.

IHT can be paid directly from the deceased’s estate where there are liquid assets.  However, it can be trickier where the main asset of an estate is a property, as the executors are required to pay the IHT before they are given authority, by the Grant of probate, to sell the assets.  If the executors are unable to temporarily loan money to the estate from their own funds to settle the IHT, another option might be to take out an executor’s loan, but these can be difficult to obtain and have a high rate of interest.

If IHT is not paid within six months of the date of death, then interest starts to accrue.  The burden on your executors to find this money up front after your death, within a tight timeframe, can be eliminated by taking out an IHT life insurance policy.  The policy can be written in trust, so that it pays out after your death, without the need for a Grant of Probate and without its value being added back to your estate.  It can then be used to settle the IHT bill.

On learning of the IHT due on Dot’s estate, viewers took to social media, some expressing surprise that her two-bedroom property could be worth so much. Others, however, verified the authenticity of the storyline, noting that it has become commonplace for homes in East London to be worth at least seven figures.

The UK property market has been experiencing a steady rise in prices in recent years, particularly in London and the South East, leading to an increase in IHT receipts. The freeze on the nil rate band for IHT at £325,000 until April 2028 means that this trend is set to continue, with the government expecting to receive even more tax revenue from estates.

The Office for Budget Responsibility (OBR) predicts that IHT receipts will continue to rise in the coming years, reaching £6.9 billion in 2025-26, up from £5.2 billion in 2019-20. This increase is due to a combination of factors, including rising property prices and the ageing population, which means that more people are passing away and leaving behind larger estates.

Families may need to plan carefully to avoid paying more tax than necessary. It may be suitable to make use of the various gifting exemptions available during lifetime, which can help to reduce the value of an estate.  These include:

• Charity Exemption – all outright gifts to qualifying UK charities are exempt from IHT.
• Annual Exemption – an individual can give away up to £3,000 each tax year. If not used or not fully used in one tax year, the unused part may be carried forward for one tax year only.
• Small Gift Exemption – gifts of no more than £250 to any recipient per tax year are exempt. The number of individuals is unlimited as long as you haven’t used any other gift allowance on them.
• Wedding and Civil Partnership Gifts – a parent may give £5,000, a grandparent may give £2,500 and anyone else may give £1,000 free of IHT.
• Gifts out of income – any regular gifts made out of excess net income are exempt from IHT. These gifts must not affect your normal standard of living; otherwise HM Revenue & Customs will deny the claim for this relief. For example, if your income is £60,000 per year but you only use £50,000 per year to maintain your normal standard of living, you can gift the balance (£10,000) without it affecting your estate for IHT purposes. However, detailed records must be kept.

Gifts made outside of the above exemptions will also not be subject to IHT if you live for at least seven years after making the gift. This can be a tax-efficient way to pass on wealth to your loved ones, although it is important to seek professional advice before making any decisions.

In conclusion, the freeze on the nil rate band for IHT until April 2028, combined with rising property prices, means that inheritance tax receipts are likely to continue to increase in the coming years. The Eastenders storyline highlighted the importance of planning carefully to avoid paying more tax than necessary, and it is important to seek professional advice to ensure that you make the most tax-efficient decisions for your estate.  Please contact the Wealth Preservation team on 0203 691 2080 for assistance.