Established 60+ years

Rising interest rates impact Inheritance Tax options

Recent hikes in the interest rate have put families on the back foot when it comes to paying Inheritance Tax (IHT).

In an era of rising house prices, it has made sense to pay inheritance tax in instalments. However, with inflation taking hold and the increasing likelihood of further interest rate rises, the cost of paying off inheritance tax over time could force people into selling the family home – or paying a steeper cost to defer those payments.

HMRC now charges families 3.75 per cent interest – the Bank of England base rate plus 2.5 per cent – for outstanding inheritance tax payments.

Inheritance tax normally needs to be paid within six months to avoid interest charges, and executors are unable to get probate and release the estate to the family until the bill is settled, says Jack Haskew, a probate specialist with KWW Solicitors.

“To avoid selling a family property, families often look to borrow money to pay inheritance tax, typically by using HMRC’s option to make 10 annual instalments on the IHT attributable to the property,” Jack adds. “This has been a good option but the increasing interest on those payments could make it a more difficult call.”

If you decide to pay the inheritance tax in instalments, the first payment is due within six months of the end of the month in which death occurs. There is no interest on the first instalment if paid on time.

The following instalments are due annually on the anniversary of that date and each annual payment will include interest on the outstanding balance.

Families can change their mind at any stage and pay the full amount of inheritance tax due. If the property is sold, the right to pay by instalments ceases and the full balance becomes due. The same applies if a mortgage is taken out on the property or if it is used as security for a loan.

If a house you received as a gift subsequently becomes chargeable for IHT because the person who gifted it to you dies within seven years, you may also be able to pay any tax due by instalments.

How much is inheritance tax and who pays? 
For IHT to kick in, an estate needs to be valued in excess of £325,000 if you are single, or £650,000 jointly upon the death of the second partner to a marriage or a civil partnership.

There is a further significant allowance – the Residence Nil Rate Band (RNRB) – which increases the threshold to £500,000 for a sole estate, or a joint £1 million if you have a partner and the estate owns a property to be left to the deceased’s direct descendants.

Once an estate reaches £2m, the RNRB allowance starts being removed by £1 for every £2 above this threshold. The amount at which the RNRB is depleted for a single person is £2.35m and £2.7m on the death of a married couple or civil partnership who did not use the RNRB on the death of the first spouse.

If your estate is worth more than this, your loved ones will have to hand over 40 per cent of your assets above those levels to the Treasury.

Paying IHT is largely unavoidable but good estate planning can help reduce or shift the overall burden, and there are various options individuals and couples can use to maximise their use of the available exemptions.

A good place to start is with a well-drafted will, which can be your entry point for reviewing your own estate plans. Contact Jack Haskew or Karen Starkey to discuss making or updating your will.

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