High interest rates on unpaid inheritance tax — a tax-upon-tax?

All aspects of daily life are under some kind of financial strain for families, individuals and businesses alike. These issues extend to IHT, where people are grappling with high interest rates on unpaid tax, compounded by processing delays. 

Nil rate band

When a person dies, IHT may be due on their estate. Each person has a tax-free allowance known as the ‘nil rate band’, which is currently set at £325,000, and frozen at this level until 5 April 2028. Any gifts that an individual makes within seven years of dying, including assets passing by survivorship and any legacies left in their will, can reduce this amount

Residence nil rate band

The ‘residence nil rate band’ is an additional allowance that might be available provided the criteria is met, i.e., owning a property that has been your residence, passing to your direct descendants on death, etc. However, the legislation around this is complex and you should seek legal advice. 

It may be possible to claim unused allowances from a spouse or civil partner, who has died before you, if they did not utilise all of their allowances on death. 

40% rate

Everything over and above these allowances and exemptions is charged at a rate of 40%. IHT due (excluding assets that benefit from an instalment option) needs to paid six months from the end of the month of death.   

Grant of Probate 

The probate registry will not issue a Grant of Probate until it has received confirmation from HMRC that the IHT has been paid.  

Upon death, the deceased’s assets are frozen. Banks will release funds to pay IHT, if there are funds available, but otherwise, all assets are unable to be encashed or sold until you receive a Grant of Probate. 

Interest rates

The Bank of England base rate determines the rates that banks and other institutions charge people who borrow or owe money.  

If you are unable to pay all of the IHT or the first instalment within the deadline, then HMRC will charge interest on any unpaid tax at a rate of 2.5% above the Bank of England base rate, currently set at 5.25%. HMRC is currently charging interest at a rate of 7.75% per annum. Whilst interest rates have been held for now, there is no guarantee they will not increase again in the future.  

With significant delays at the probate registry and current timescales at 16 weeks from the date the application is received, families are, in essence, paying hundreds or thousands of pounds in additional IHT. Herein lies the issue. One estate had interest charged at a rate of £368,000 per annum.  When you consider that the average house price in the UK currently stands at £287,546, this interest is substantial.

There are a number of options available to executors:

• it is important to take advice early on to ensure that all applicable exemptions and reliefs are taken advantage of, reducing the overall IHT paid by an estate
• it might be possible to elect to pay in ten annual instalments, the first instalment being payable at the six month period if the estate contains immoveable property. HMRC will charge interest on any unpaid IHT but this might enable the executors to get the Grant of Probate in order to be able to sell the property and release funds to pay the remaining tax and interest due
• any liquid assets might be able to be paid directly to HMRC as much of the IHT due as possible, reducing the amount of interest that will be charged
• beneficiaries or executors could fund the IHT to prevent further interest accruing
• the executors could look at personal finance options but the interest rate will need to be compared with that charged by HMRC to see if this is a feasible route to take
• the executors might be able to request that HMRC allow them to apply for a Grant on Credit, although they must be able to demonstrate that they have made every practical effort to raise the funds
• in circumstances of financial hardship, the executors may be able to make a claim to expedite the application, although these are rarely successful

Dealing with the death of a loved one is a difficult time for those involved. Due to the complexities and time constraints executors are currently facing, it is important to seek advice from a solicitor as soon as possible. 

The private client team, can advise on wills for elderly clients, single people, married couples and civil partners while offering advice on tax planning and lasting powers of attorney. They also act for executors and trustees primarily based in the UK on a wide variety of tax, trust, succession and estate planning issues.

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