HMRC more than doubles interest rate on overdue IHT to 6%

The interest rate charged on overdue inheritance tax (IHT) will increase to 6%, which is more than double the rate at the start of last year, according to the latest figures from HM Revenue & Customs (HMRC).  

One year ago the interest rate charged was 2.75%, and its increase to 6% is effective from 6 January.

This change is driven by base rate rises following the economic turmoil experienced by the UK recently, according to Canada Life.

IHT is normally due by the end of the sixth month after the event, and failure to pay by that point will result in interest being charged. For example, if the person dies in January, IHT must be paid by 31 July.

However, IHT can also be paid in advance. If the estate has not been settled within the six month period, an estimated IHT charge could be paid to HMRC. In the event that too much is paid, HMRC will refund any excess plus interest at the substantially lower rate of 2.5%.

These changes have resulted in the differential between the rate of interest estates need to pay HMRC, and the interest HMRC pays out, to increase from 2.25% at the start of 2022 to 3.5% now.

IHT can be paid in equal annual instalments over ten years, especially needed when things take time to sell, but estates will have to pay 6% interest on the outstanding balance.

Canada Life technical director Andrew Tully said: "IHT normally needs to be paid within six months and it will be difficult for many estates to be settled within this period. The current economic climate means significantly higher interest rates will be charged, with the potential for these to increase further as we move through 2023.

"Beneficiaries can pay HMRC in advance but many will not have available assets to allow this to happen. Where IHT is due on assets which may take time to sell, such as the family home, it's possible to pay the bill in annual instalments over ten years.

"This allows the family to keep the asset and pay the tax due gradually. However, the big increase in interest rates will make this a less attractive option. IHT is a complex area so people affected should take expert financial advice which will help work out the best outcome for their particular circumstances."