When and How to Pay Inheritance Tax
We all know the old saying about the only certainty in life being death and taxes. So, it is important to know when and how to pay inheritance tax if you are named as an executor in a will. The most recent showed that 27,000 estates paid inheritance tax in 2020-21. Although this figure represents less than 4% of the population, you will want to try to pay quickly if any tax is due to avoid interest being added to the tax liability.
When is inheritance tax due?
Inheritance tax becomes due at the end of the sixth month after someone has died. For example, if a person dies in January, then inheritance tax will be due by 31 July. If none or only part of the tax is paid by that date, then any amount outstanding will be subject to interest, calculated on a daily rate by reference to HM Revenue and Custom’s annual rate in force. As the interest rates change, the daily rate changes, so unpaid inheritance tax can have a number of discrete time periods where a different interest rate is being imposed.
Any inheritance tax due must usually be paid within the six-month deadline. However, if there is a property in the estate then the inheritance tax liability will be divided proportionately between the value of the property and of all other assets. The tax due on the property can be paid in ten annual instalments if insufficient funds are available to settle the whole liability.
This allows the executors to apply for the Grant of Probate and release the funds needed to pay any outstanding inheritance tax. However, interest will still continue to accumulate on any unpaid tax, therefore, it is better to pay all of the tax due if possible.
Do interest rates affect inheritance tax?
Between 2008 and February 2022, the interest rate due on inheritance tax stood anywhere between 0 – 3%. However, over the past couple of years interest rates have rapidly increased, with a corresponding rise in HMRC rates. Since August 2023, the current interest rate on unpaid inheritance tax is 7.75%, the highest it has been since 1991.
In practice, this can have a significant effect on the amount owed. An estate with an inheritance tax liability of £100,000 will be charged £677.60 in interest if this sum is left unpaid for just one month. For this reason, it is important to try and pay as much inheritance tax as quickly as possible.
How to pay inheritance tax
It seems like a Catch-22, in order to apply for the Grant of Probate and release any assets the inheritance tax must be paid first; however, those assets are often needed to pay the tax due. There are a number of options available.
- Inheritance Tax Direct Payment Scheme
You can request that inheritance tax is paid directly from any bank, building society or NS&I account the deceased held. Often, requests are made to different banks to pay inheritance tax due where insufficient funds to settle the liability in full are held in one account, but there are enough funds spread across the various accounts.
- Investments
Certain companies may be willing to sell investments held in the deceased’s name and use the sale proceeds to pay the inheritance tax due. Whilst it is not guaranteed, it is worth asking the stockbroker or fund manager whether this can be arranged.
A similar arrangement may be available if the deceased held an insurance policy or investment bond.
- Grant on Credit
If all of the above methods are still not enough, then you can apply to postpone payment of the inheritance tax until a Grant has been issued. This is called a Grant on Credit, and it allows the executors to obtain the Grant required to access assets needed to pay the inheritance tax due which cannot be released pre-Grant. It can only be applied for if it is not possible to pay the inheritance tax due without a Grant.
Once the Grant has been issued, any tax due will become payable once again and the interest will continue to accrue until it is paid.
Here to Help
Whilst the prospect of paying inheritance tax may seem daunting, there are a number of options available, which can be used at the same time. The key point is to not ignore the tax due and allow interest to build and risk potential fines for failure to settle the liability in a timely manner.
For advice about when and how to pay inheritance tax, probate and wills, please contact our Private Client team.
Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.
