HMRC interest rates – the cost of paying IHT by instalments

For many years whilst interest rates and inflation were low, there was an economic logic to paying IHT due on land following a death by interest bearing instalments over the permitted 10 year term. 

In the current economic climate this is no longer the case.  The interest rates applicable to outstanding IHT have been steadily increasing.  This time last year the rate was 3.75%.  It is currently 7.5% and due to rise to 7.75% from 22^nd August 2023.  On a debt of £250,000 that amounts to an annual charge of £19,375, a daily rate of £53[1] 

If you have opted into the instalment regime your options are:-

• Continue with the instalment payment - if you are nearing the end of the 10 year term then your debt will be less, so the impact of the interest rate increases may not be as painful.  Further, cash flow may not permit earlier settlement.
• Pay off all outstanding IHT in full - if you have sufficient funds to do this then it is worth considering. 
• Make an overpayment - how this operates is different from the common perception - you do not reduce your annual instalments for the remainder of the term.  The amount of your annual instalment is fixed and will remain the same, falling due on the same date each year.  If you make an overpayment to HMRC they will hold that deposit and then apply it to the fixed annual instalment payment and the interest to be charged on the relevant payment date.  An overpayment therefore usually results in a payment holiday until such time as your deposit is exhausted at which point the subsequent fixed annual instalments resume.  You will however pay less interest overall as less IHT is outstanding over the period.

HMRC used to issue annual IHT instalment calculations but no longer do so.  The onus is now on you as the taxpayer to make your payments by the correct date and to calculate the interest due.  HMRC’s online interest calculator assists in this process but remember to calculate the interest on the value of the outstanding IHT for the last year and not the value of the instalment being paid.

Here are the relevant links:

Inheritance Tax thresholds and interest rates - GOV.UK (www.gov.uk)

HM Revenue & Customs: Inheritance Tax interest calculator (hmrc.gov.uk)

[1] These figures assume the rate of 7.75% for the entire year whereas in reality a number of different rates will apply.