Where inheritance tax is payable on an estate, it must normally be paid by the end of the sixth month after that in which the death occurred. For example, if the deceased died on 22 August 2021, inheritance tax on the estate would be due by 28 February 2022.
The six-month deadline does not leave very long if the executors need to sell assets in order to realise funds from which to pay the inheritance tax on the estate. HMRC recognise this, and allow inheritance tax to be paid in instalments in some circumstances. Where the executors wish to pay the inheritance tax in instalments, they must indicate this on the inheritance tax account (IHT400).
When payment can be made in instalment
The instalment option is only available in respect circumstances and in respect of certain assets:
- Houses – where the estate includes one or more houses, inheritance tax can be paid in instalments where the beneficiaries keep the house/houses to live in.
- Shares and securities – an instalment option is available if the shares or securities allow the deceased to control more than 50% of a company.
- Unlisted shares and securities – payment can be made in instalment if the shares are worth more than £20,000 and they represent at least 10% of the total value of the shares in the company at the price at which they were first sold (their ‘nominal’ value) or 10% of the total value of ordinary shares held in the company, at the price at which they were first sold.
It is also possible to pay the inheritance tax due on the whole estate (including that on assets which do not fall into the above categories) if at least 20% of the inheritance tax owed by the estate relates to assets that qualify for payment by instalment, or where paying the inheritance tax in a single lump sum would cause financial difficulty.
Interest is charged from the normal due date at the end of the sixth month following that in which the deceased died to the date of payment. Interest is not charged on the first instalment unless it is paid late.
Payment over 10 years
Where the instalment option is available, payment can be made over 10 years. The first payment must be made by the normal due date of the end of the sixth month following that in which the deceased died. Payment must then be made annually on that date. The amount payable each year is 10% of the tax payable in instalments, plus the associated interest.
If the asset in respect of which the tax is being paid in instalments is sold, the remaining tax owing must be paid in full.
Clearing the balance
Where the option to pay in instalments is taken, the outstanding balance can be cleared at any time.