hmrc

Interest rate rises on unpaid inheritance tax described as ‘stealth tax’

Interest rate rises on unpaid inheritance tax are a “stealth tax” and a substitute for actual inheritance tax rate rises, it has been suggested.

The current interest rate on unpaid inheritance tax is 7.5% having risen 13 times since the start of last year and five times this year alone. This is also some 2.5% higher than the base rate of 5% as set by the Bank of England.

With probate delays soaring, practitioners are finding it difficult to administer estates within the six-month period from the end of the month of death before interest accrues. Michael Culver, Managing Director at Culver Law, described it as “nothing more than a stealth tax increase”, describing the six-month timeframe as “ridiculously short”:

“When compared to the timeframes provided for someone to pay their income tax bill or corporation tax bill, this seems especially and unnecessarily punitive.

The government cannot increase the rate of inheritance tax of course as to do so would be disastrous ahead of the future general elections. So, instead of taking what would be an extremely unpopular measure, they simply charge additional interest on late payments.

The truth of the matter is […] that in many cases, where property is the main asset of the estate and often the cause for estates to become subject to inheritance tax in the first place, it is impossible to take the necessary steps to sell the property and pay the tax in such a short timescale.

[…] In the vast majority of taxable estates, it is proving almost impossible to even get the grant within the six-month window, let alone commence marketing the property for sale. This leads desperate beneficiaries to attempt to fund the inheritance tax bill from their own assets.”

Natalie Payne, Partner at Morr & Co, largely agreed with Culver, suggesting that current probate grant timelines are “inexcusable and unfairly penalise beneficiaries”:

“When I qualified in 2010, the average time for a grant or representation to be issued was around three weeks. This begs the question as to why since 2020 we now have up to a 16-week turnaround period. I accept some grants of representation are issued within that window, but the majority are not.

If this is now the norm, the fairest way to compensate would be to extend the period from which interest on unpaid IHT begins to be incurred from six months to at least nine months from the date of death. Otherwise, HMRC appear to be profiteering from the delays. Due to the delays and interest rates, we’re hammering home to our clients that they need consider how the IHT will be paid on their deaths when preparing wills.

Not only does the Probate Registry have extensive issuing delays, but HMRC’s turnaround times for processing the issuing of clearance certificates for IHT and CGT/income tax, IHT refunds, and issuing CGT references is appalling.

This is causing estate administrations to become protracted and sometimes to breach the two-year post death threshold, meaning that some estates must be unnecessarily registered on the Trust Registration Service register. This creates more unnecessary administration and costs for the personal representative(s) and ultimately the beneficiaries.”

Sharing a similar view was Andrew Shirtcliffe, Business Development Director – Inheritance Funding, Ampla Finance:

“With the interest rate on unpaid IHT at a 15-year peak of 7.5%, families already facing financial strain due to bereavement are left confronting an additional burden. Projections of further Bank of England interest rate rises cast a shadow of even higher IHT interests in the near future.

Simultaneously, delays in the probate process, now exceeding 12 months on average, amplify these financial pressures by prolonging the payment period and allowing interest to accrue. Staffing shortages and increasing complexities in probate procedures have contributed to these delays, despite government assurances to address these challenges.

This combined effect of soaring IHT interest rates and protracted probate proceedings presents a severe test for families, threatening to amplify their financial distress during an already challenging time. These issues call for a comprehensive review and reform of the system to alleviate this growing burden.”

These views are not, however, universal. For example, when discussing the issue on social media recently, one practitioner queried whether interest on late payment should be viewed as a form of death duty.

Today’s Wills and Probate approached HMRC on the issue, who described the interest rates as “fair”. A spokesperson said:

“For the majority of estates, probate delays do not have an impact on IHT payments as these have to be made before probate is granted. We continue to meet our target of processing 85% of IHT accounts within 15 working days.

The interest we charge and pay is fair. It ensures people are not encouraged to overpay their tax to secure a higher interest rate than available commercially, while those paying late don’t get an unfair financial advantage over those paying on time.”

They also pointed out that “a number of payment methods are available to help personal representatives pay IHT,” pointing out the Direct Payment Scheme – which can be used to transfer money directly from the deceased’s account(s) to HMRC before probate is granted – as an example.

They also stated that if an estate includes assets such as a house, land, buildings, or certain shares and securities, the tax on those assets can be paid in instalments over a 10-year period as long as they are not sold.

Where personal representatives cannot benefit from the above payment methods and find it impossible to raise the funds needed to pay the IHT due, HMRC can also issue a grant on credit.

As to why their rates are significantly higher than the base rate and why the repayment interest rate is lower than the late payment rate of the main taxes, they said:

“Most other comparable tax authorities take the same approach and the Government’s consultations on interest most agreed or accepted there should be a differential.

Setting a repayment rate higher than the Bank of England rate could lead to taxpayers deliberately overpaying their tax to achieve a higher interest rate than is available commercially.”

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