HMRC allow estates with an IHT liability in relation to certain assets to pay the liability over a period of 10 years. These are paid annually in equal instalments, which attract interest.
This can be a useful option for families who do not wish to part with those assets, but who would otherwise have to, in order to cover the cost of the IHT liability.
Assets that qualify are:
- Residential Property
- Unlisted shares and securities, providing that they are:
- Worth more than £20,000; and
- They represent 10% of the total value of the company.
The same rules apply when IHT arises on gifts that have been made during your lifetime, or when a trust is liable to pay IHT on qualifying assets.
If the asset is sold, the IHT becomes payable in full at that point. But whilst you keep it, you may continue to pay by instalment.
Impact of increasing interest rates
Unfortunately, HMRC do not offer the instalments option for free. Interest will be applied to every instalment after the first one (assuming it is paid on time).
Because HMRC’s interest rates track the base rate of interest, the rate payable has been gradually increasing over the last 18 months. During that period, the rates have risen on a monthly basis from a relatively palatable 2.6% in January 2022 to 7%, from 31 May 2023.
Interest is added to the overall IHT liability on the remaining balance on an annual basis and the interest for the year is due in arrears along with that year’s instalment payment. Many estates receiving statements for the last 12 months are therefore likely to find that the payment due this year could be significantly higher than the amount they were paying 12 months ago. For example, on a £100,000 balance of IHT, the payable between 1 July 2022 and 30 June 2023 will now be just short of £5,500. For the same period last year, the liability was a little over £2,800 – i.e., the amount payable has almost doubled during that time.
So, what are the options?
Sadly, unless you are in a position to pay off the full liability in a single payment, you will continue to attract much higher interest rates than previously. And unlike with a mortgage, there is no option to fix the rate or change your deal – if interest rates continue to increase, the amount you pay will continue to increase.
This may mean that many decide that it is no longer economical to keep the assets they have retained. Alternatively, it may be possible to secure finance at a better rate, although that seems unlikely in today’s climate.
If you are currently paying IHT by instalment, please ensure that you are budgeting for these changes so that you are prepared the next time the brown envelope requesting the payment arrives with you.
What next?
To discuss the contents of this article in more detail or any other tax matter, please do not hesitate to speak to Michaela Lamb or get in touch with the private client tax team here.
