The government has announced that the interest rate it charges on overdue inheritance tax (IHT) will increase to 6% from today.

This rate has more than doubled in the last 12 months having sat at 2.75% in January last year, but a succession of increases through 2022 have been driven by the Bank of England’s base rate rises in response to the UK’s economic turmoil.

IHT is normally due by the end of the sixth month after the event, such as 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 by HMRC.

It is also 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 HMRC. If this amount paid turns out to be too much, HMRC will refund any excess plus interest – however the interest HMRC will pay on the overpayment is substantially lower, at only 2.5%.

Commenting on the latest change, Canada Life technical director, Andrew Tully, 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.”

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