Interest Rate Increases on Inheritance Tax
It has been reported that those who opt to pay Inheritance Tax (IHT) in instalments are now facing higher payments due to another increase in interest rates. On 11th July 2023, the interest rate for paying IHT in instalments increased to 7.5%. The second rise this year.
What is Inheritance Tax?
Inheritance Tax is a tax on the estate of someone who has died. The executors of the estate (if there is a Will) or administrators (if there is no Will) are responsible for organising the payment to HMRC.
IHT may be charged either on the death of an individual, or, on gifts made whilst someone is alive that exceed the available allowances to individuals where the donor does not survive by 7 years, or, to a company or into a trust.
What are the Rates for Inheritance Tax?
The standard IHT rate is 40%. This is only chargeable on the part of the estate that is above the available allowances. The current threshold for IHT for an individual is £325,000, referred to as the Nil Rate Band, meaning that the value of an estate below £325,000 is not chargeable to IHT. If the estate exceeds £325,000, IHT is potentially charged at 40%, unless at least 10% of the net value of the estate is left to charity, then the rate is reduced to 36%. Certain types of assets also qualify for special reliefs and gifts to spouses, civil partners or charities do not attract IHT.
Certain individuals will also qualify for the Residence Nil Rate Band of £175,000, however, this is only available where an individual leaves residential property, that they have lived in, to a direct descendant, such as by a child, grandchild, or other lineal descendants, spouse, civil partner or widow provided that they have not remarried or formed a new civil partnership before the deceased’s death.
This could potentially mean that an individual can pass up to £500,000 free from IHT on death.
For married couples and those in civil partnerships, there is the potential to transfer unused allowances on the first death to the survivor, meaning that on the death of the second spouse up to £1 million could pass free from IHT. It is advisable to take advice to ensure that Wills are structured to take advantage of the available allowances and to make sure they are not lost.
Inheritance Tax Rates from January 2022 to Present
| Timeframe | Interest Rate (%) | Interest Rate on Repayments (%) | Number of Days |
| 31st May 2023 – present | 7 | 3.5 | N/a |
| 13th April 2023 – 30th May 2023 | 6.75 | 3.25 | 48 |
| 21st February 2023 – 12th April 2023 | 6.5 | 3.0 | 51 |
| 6th January 2023 – 20th February 2023 | 6 | 2.5 | 46 |
| 22nd November 2022 – 5th January 2023 | 5.5 | 2 | 45 |
| 11th October 2022 – 21 November 2022 | 4.75 | 1.25 | 42 |
| 23rd August 2022 – 10th October 2022 | 4.25 | 0.75 | 49 |
| 5th July 2022 – 22nd August 2022 | 3.75 | 0.5 | 48 |
| 24th May 2022 – 4th July 2022 | 3.5 | 0.5 | 41 |
| 5th April 2022 – 23rd May 2022 | 3.25 | 0.5 | 48 |
| 21 February 2022 to 4 April 2022 | 3 | 0.5 | 43 |
| 7 January 2022 to 20 February 2022 | 2.75 | 0.5 | 45 |
A record of the change of interest on IHT in recent years.
When is it Payable?
Inheritance Tax is due six months after the end of the month of death. Personal Representatives (the executor or administrator of the estate) cannot get Probate and release the estate to the beneficiaries until the IHT bill is paid. The IHT can be paid in one lump sum or in 10 equal yearly instalments if it relates to either land or business property, the first instalment falling due six months after the end of the month of death. If the instalment option property is sold, all outstanding tax and interest becomes payable.
Paying Inheritance Tax in Instalments
When paying by instalments an interest rate is applied to all but the first instalment. This interest rate has now risen to 4.25%; the fifth rise in 2022.
This option of paying Inheritance Tax in instalments has always been a preferable option to those who do not wish to sell the family home. However, the rise in interest rates may force families to sell the property if they cannot afford the repayments, particularly as interest rates are continuing to rise.
HMRC IHT receipts have recently risen by 19% caused in part by increases in asset values, including housing prices. The available allowances have also been at £325,000 and £175,000 up to and including the tax year 2025/2026, meaning more estates could potentially exceed the allowances as property prices rise further.
2023 Updates
Starting from May 31, 2023, the interest rates for late payments on taxes, including IHT, will rise to 7% following the recent upward adjustment in the Bank of England base rate. Simultaneously, the repayment interest rate will increase to 3.5%.
You can contact The Wilkes Partnership for assistance with estate and tax planning and estate administration on 0121 233 4333 or visit https://wilkes.co.uk.
FAQ
Is interest applicable to inheritance tax payments?
No, interest is not charged on inheritance tax.
What is the interest rate for paying inheritance tax in instalments?
The interest rate for IHT instalments varies based on the specific circumstances and terms set by HMRC.
What rate of interest does HMRC impose?
The interest rate imposed by HMRC depends on the type of tax and payment situation. Specific rates can be obtained from HMRC directly.
What occurs if you overpay inheritance tax?
If you have paid more than the required amount of inheritance tax, you may be eligible for a refund from HMRC.