Inheritance Tax interest rates continue to rise

As Inheritance Tax (IHT) interest rates continue to increase, Personal Representatives face additional financial burden when settling a deceased person’s estate. The increased interest rates have been described as a stealth tax, substituting a rise in IHT rates.

As a result of soaring inflation and increased property prices, more families across the country are subject to IHT upon the death of a loved one. Despite this, the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) tax-free allowances remain at £325,000 and £175,000 respectively – this has been frozen until April 2028. Currently, IHT is charged at 40% on any part of an estate that exceeds the tax-free thresholds. An individual’s NRB and RNRB can be combined to £500,000 if a property passes to a linear descendant; married couples with children can combine their allowances to £1 million. Any part of an estate that passes to a spouse/civil partner or a charity is free from IHT. There are also several organisations, such as community amateur sports clubs, that are typically exempt.

In the 2022/2023 financial year, IHT receipts hit a record-breaking £7.1 billion – this was up from £6.05 billion in 2021/2022. The Office of Budget Responsibility forecasts that IHT receipts will increase each year, hitting £7.2 billion in 2023/2024 and reaching £8.4 billion by 2027/2028. According to GOV.UK, June 2023 has seen the highest monthly total of IHT receipts on record – it is believed that this is a result of the increased interest rates, which may have prompted more Personal Representatives to pay any IHT liability sooner than they otherwise would have. However, this cannot be confirmed until HMRC’s full administrative information is available.

What is the interest rate on unpaid Inheritance Tax?

Throughout 2023, the interest rate on unpaid IHT has increased six times. On 22 August 2023, interest increased to 7.75% – an increase of 1.75% from January 2023 – and interest on repayments increased to 4.25%. The data demonstrates that interest is rising every 40-50 days; therefore, further increases are anticipated for the remainder of the year. A breakdown of the increases for 2023 can be seen below:

Kings Court Trust’s Head of Service Delivery, Lee Rossiter, commented:

The number of times the IHT interest rate has increased over the past 8 months is unlike anything I have seen during my 14 years in the industry. To find higher interest rates than the current rate charged by HMRC, you would need to go back to 1991. Therefore, the speed and efficiency of anyone administering an estate is more important than ever to keep the IHT bill down and maximise the residuary estate. This is becoming a greater challenge each month due to the Probate Registry delays, which continue to worsen.

When is interest due on Inheritance Tax?

IHT must be paid by the end of the sixth month after the person’s death. For example, if the individual passed away in January, any IHT must be paid by 31^st July. If it’s not paid within this time, HMRC will charge interest on the amount owed. If there are insufficient funds to make the IHT payment during the six-month deadline, a 10-year annual instalment plan can be agreed with HMRC. This is applicable for assets such as houses, shares and securities (including unlisted), businesses run for profit, and agricultural land and property. Gifts can also be paid in instalments if IHT is payable on buildings, shares or securities, and part or all of a business. Read more about Business and Agricultural Relief.

Ongoing delays are still being experienced at the Probate Registry as they continue to receive more applications than Grants issued, significantly delaying the estate administration process for many. Personal Representatives cannot sell a property until they have obtained a Grant of Probate, and even once this has been obtained, the sales process can take months to complete. Currently, the average age of our outstanding applications at the Probate Registry is nine months, meaning interest is unavoidably accrued after the six-month period before a Grant has even been obtained. Read more about the ongoing Grant of Probate delays.

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