HM Revenue & Customs (HMRC) has announced the interest rate it charges on overdue inheritance tax (IHT) will increase to 6% from 6 January 2023.
One year ago, the interest rate was 2.75% so the new rate is more than double the one at the start of last year, driven by base rate rises looking to combat the current economic crisis.
The UK taxman has said that from 6 January 2023:
- Interest rate due to HMRC on late payment of IHT is now 6%; and
- Interest rate paid by HMRC if you are due a refund for overpaid IHT is now 2.5%.
IHT is normally due by the end of the sixth month after the event – for example, six months after an individual has died, or six months after transfers into or out of a trust, known as ‘exit charges’. If IHT is not paid by that point, interest will start to be charged.
It is possible to pay IHT in advance. If the estate has not been settled within the six-month period, an estimated IHT charge could be paid to the UK taxman. If too much is paid, HMRC will refund any excess plus interest, however the interest HMRC will pay on the overpayment is substantially lower, at only 2.5%
Brits can pay IHT on assets that may take time to sell in equal annual instalments over 10 years. However, they have to pay interest – that rate is now 6% on the outstanding balance.
‘Complex area’
Andrew Tully, technical director at Canada Life, 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 won’t 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 10 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.”
