Increased interest rate on overdue inheritance tax

As of 22 August 2023, HM Revenue and Customs bumped the interest rate on inheritance tax (IHT) that is paid late up to 7.75%. The interest rate has steadily increased since 7 April 2020, when it was 2.6%.

Background

Due to the fact that this increase is happening amid a cost of living crisis and at a time of high inflation, it has been deemed unreasonable by some, particularly when bereaved families are already struggling to keep up with the processes associated with estate administration while coping with the loss of their loved ones.

The deadline for payment of IHT is on the last day of the sixth month after the date of death. Payments received after this date will be subject to the 7.75% interest rate mentioned above. Punitive measures for late payments in the form of increased interest rates are not a new practice, despite there often being justifiable reasons for families to pay IHT late.

Scenario A

Hugh and Olivia are survived by their children and grandchildren. They owned no assets of considerable value except their family home, worth £1.5 million, which left their children struggling to pay the IHT due on their death.

Although the children would much rather keep their parents’ home in which they grew up, they cannot afford to do so and opt to sell it. Before selling the property, they need to apply for a Grant of Probate (Grant), which currently takes approximately 16 weeks to be issued. However, herein lies the difficulty, as IHT is payable by the estate before an application for a Grant can be made.

If there are funds in bank accounts, these can be accessed before the Grant is issued by asking the bank to pay the funds directly to HMRC. Where there is a property, it is possible to ask HMRC to allow payment in instalments over a 10-year period. However, interest will apply when choosing the latter option and, given the state of the property market, if the property takes a long time to sell, there could be a very high amount of interest to pay.

Cross-Border Coordination

Many Brits own holiday homes abroad but are not familiar with the complicated succession and tax issues that may arise when their estate passes to their children. In light of the interest rate increase, it is becoming crucial for legal professionals to coordinate succession and tax planning across different jurisdictions. With early planning and the right legal advice, the risk of paying interest on IHT can be minimised.

Scenario B

Steven has lived in France for the past 25 years, but recently decided to move back to the UK following his wife’s death. He is a UK national but still owns a property in France. On his death, HMRC will assess his worldwide assets for UK IHT, including his French property.

When his children inherit the French property, they will require the assistance of a French notaire if they wish to sell the house. In this case, Stone King LLP may be able to help by acting as a point of contact between the notaire, while working on the administration of the UK estate. If the children are selling the house in order to pay IHT, then a direct line of communication with a trusted notaire will be especially useful to avoid any delays.

For more information, please contact solicitors in the International and Cross-Border Team at Stone King LLP (Charlotte Macdonald, Dan Harris, Raquel Ugalde, Emma Seaton, Bryony Anning or Marina Emmanouel) either by calling +44(0)1225 337599 or by emailing international@stoneking.co.uk.