When someone dies, inheritance tax does not have to be paid until six months after the end of the month in which death occurred. For example, if a person died on 17th August 2009, there will be no interest charged on inheritance tax (“IHT”) until 1st March 2010. Because base rates are currently so low, the interest rate is zero both for interest charged on IHT paid after the six month period and for interest paid on any refunds of overpaid IHT. Therefore, H M Revenue & Customs has recently decided to increase the rate of interest to 2½ % above base rate (ie 3% at present) for late payments of IHT and, at the same time, it has fixed the interest it pays on refunded, overpaid IHT at 1% below base rate, with a minimum rate of 0.5%.
Given the current state of the property market, it is not unusual for it to take more than 6 months to sell a house in an estate to produce the funds to pay IHT. In taxable estates where the main asset is the house and there is little in the way of liquid assets this can cause problems. Although any IHT due can be paid by equal, annual instalments over ten years, those payments made after the 6 month grace period, are subject to interest until all the IHT has been paid.
Therefore if the estate is taxable, and the house is the main asset, careful planning is needed to ensure that these interest payments are minimised.
HMRC estimates that it will collect £2.2 billion in IHT on about 12,000 taxable estates in the current tax year (2009/10).
