With the inheritance tax (IHT) threshold frozen at £325,000 until at least April 2028 more estates are having to pay this tax. Between April and July 2023, IHT receipts were up by 10 per cent compared with the same period last year.
While there are steps people can take during their lifetimes to reduce their estate's liability, such as giving gifts and saving into pensions, sometimes an IHT bill is unavoidable. But if you find yourself dealing with the estate of a loved one and IHT is due, you can at least try to avoid late payment interest and penalties by paying attention to potential bureaucratic traps.
IHT must be paid by the end of the sixth month after the person died to avoid accruing late payment interest. The rate for this is 2.5 percentage points above the Bank of England base rate so it has climbed over the past couple of years from 2.8 per cent in January 2022 to 7.75 per cent.
Paying on time can be more difficult when dealing with less liquid assets such as property. If the estate is in the process of being valued and you don’t know exactly how much IHT is owed, you could start making payments to reduce the amount of late interest you will be charged via a “payment on account”. If you end up overpaying, HM Revenue & Customs (HMRC) will refund you at a later date.
You normally need to pay IHT before applying for probate, which grants you the legal right to deal with someone’s estate. Chris Shepard, tax partner at Evelyn Partners, says that this “can prove very tricky for some families, particularly those who are property-rich but otherwise do not have significant cash". For certain assets, you can pay the tax in 10 annual instalments, but these usually accrue interest.
Until probate is granted, the sale of a property cannot be completed, making things even more expensive for cash-poor estates that rely on selling assets to settle the IHT bill in full. And probate grants have become slower in the past couple of years. In the first quarter of 2023, they took 9.2 weeks on average compared with 6.7 in the first quarter of 2020. This becomes significantly longer for paper rather than digital applications, at 22.6 weeks. Or if the application is ‘stopped’, for example because some documents are missing, on average it takes 20.1 weeks. So start the process as soon as possible and pay the IHT as soon as funds are available.
As well as late payment interest, HMRC charges penalties if you don’t pay the right amount of IHT. Figures obtained by NFU Mutual show that total penalties amounted to £2.28mn in 2022-23, a 34 per cent year-on-year increase.
Sean McCann, chartered financial planner at NFU Mutual, says penalties are normally issued to families who either undervalue the assets being passed down or don’t include them on the return. “The rising value of property and other assets may have contributed to families underestimating values," he says. "Many are also not aware of the need to include gifts made by the deceased in the seven years before their death.”
The penalty can be worth up to 30 per cent of the additional tax owed if the error resulted from the family not taking ‘reasonable care’, for example they did not get a professional valuation for their property, or up to 70 per cent if the mistake is deemed to be deliberate.
