HMRC Inheritance Tax: Customer Guide

Will I have to pay any interest?

• When is interest charged?
• What is the rate of interest?
• How do I work out the interest on tax not being paid by instalments?
• How do I work out the interest on tax being paid by instalments?
• When is interest not payable on instalments?
• What happens about the interest if I make a payment on account?

When is interest charged?

Interest is charged on inheritance tax you have not paid by the due date. (See table 1 below)

The reason why you have not paid the tax does not matter. Interest is not a penalty, it compensates the Exchequer for the delay in receiving the money due to it. If you pay too much tax, we pay interest on the overpayment at the same rate as we would charge interest if tax was overdue.

Table 1

Month of death	Due date	Interest starts from
January	31 July	1 August
February	31 August	1 September
March	30 September	1 October
April	31 October	1 November
May	30 November	1 December
June	31 December	1 January
July	31 January	1 February
August	28/29 February	1 March
September	31 March	1 April
October	30 April	1 May
November	31 May	1 June
December	30 June	1 July

What is the rate of interest?

Table 2 below sets out the rates of interest.

Table 2

Interest period	Number of Days	Interest Rate
6.10.88 to 5.07.89	273	9%
6.07.89 to 5.03.91	608	11%
6.03.91 to 5.05.91	61	10%
6.05.91 to 5.07.91	61	9%
6.07.91 to 5.11.92	489	8%
6.11.92 to 5.12.92	30	6%
6.12.92 to 5.01.94	396	5%
6.01.94 to 5.10.94	273	4%
6.10.94 to 5.03.99	1612	5%
6.03.99 to 5.02.00	337	4%
6.02.00 to 5.05.01	455	5%
6.05.01 to 5.11.01	184	4%
6.11.01 to 5.08.03	638	3%
6.08.03 to 5.12.03	122	2%
6.12.03 to 5.09.04	275	3%
6.09.04 to 5.09.05	365	4%
6.09.05 to 5.09.06	365	3%
6.09.06 to 5.08.07	334	4%
6.08.07 to 5.01.08	153	5%
6.01.08 to		4%

How do I work out the interest on tax not being paid by instalments?

1. Work out the number of days from the date interest starts (table 1) to the date you expect to pay the tax, including those two days themselves.
2. From table 2, find out the interest rate for that period.
3. Multiply the tax due by the interest rate then by the number of days and divide the answer by 366

tax due x interest rate % x number of days/366 = interest due

Example 1

The deceased died on 7 March 2004. The papers and tax were sent to us on 14 December 2004. The tax due was £5,000.

The date interest starts from for a death in March is 1 October the same year. The start date is 1 October 2004 and the finish date is 14 December 2004.

1. The number of days between those two dates is 75:

• days in October = 31
• days in November = 30
• days to 14 December = 14
• Total = 75

2. The rate of interest for the period 1 October 2004 to 14 December 2004 is 4%
3. The interest due is:

£5,000 x 4% x 75/366 = £40.98

How do I work out the interest on tax being paid by instalments?

Interest is normally payable on instalments from the date when the first instalment is due. On the first instalment, we charge interest, on that instalment only, from the due date to the date of payment.

On each later instalment, we charge interest

• on the whole unpaid portion of the tax, for one year, and
• on the instalment itself, from the date it is due to the date of payment.

Example 2

The deceased died on 7 March 2004. The papers and tax were sent to us on 14 December 2004. The tax due on the instalment option property is £10,000. Each instalment is therefore £1000.

The date interest starts from for a death in March is 1 October the same year. The start date is 1 October 2004 and the finish date is 14 December 2004 which is 75 days.

Instalment 1

£1,000 x 4% x 75/366 = £8.19 interest for late payment

Instalment 2

The second instalment is due on 1 October 2005 and is paid on 15 October 2005, which is 15 days late. Interest is charged on the late payment:

£1,000 x 3% x 15/366 = £1.23 interest for late payment

plus interest is charged on the whole of the outstanding balance for the whole year from 1 October 2004 to 30 September 2005:

This period covers two different interest rates, so the calculation of interest is:

£9,000 from 01/10/2004 to 05/09/2005 340 days @ 4% = £334.43

£9,000 from 06/09/2005 to 30/09/2005 26 days @ 3% = £18.44

Total = £352.87

The total tax and interest due on the second instalment is therefore

• tax - £1,000.00
• interest 1 - £1.23
• interest 2 - £352.87
• Total - £1,354.10

When is interest not payable on instalments?

Inheritance tax paid by instalments on some types of asset is interest'free. (We call this 'with interest relief' or WIR.) This means you only pay interest if you pay the instalment itself after the date it is due.

Instalments of inheritance tax are interest-free (if the instalments are paid on time) if the tax is on

• shares or securities which qualify for payment by instalments. But shares in an investment or property company (whether a dealing or holding company) qualify only if the company is
  • a holding company of companies, which are not investment or property companies, or
  • a market maker or discount house in the UK
• a business or interest in a business carried on for gain
• land which qualifies for agricultural relief, and
• timber.

What happens about the interest if I make a payment on account?

You may send money on account at any time, even if you have not received a calculation. This will stop interest running on the amount you have sent. (This amount is shown on calculations as a 'deposit'.) When we send a calculation, it will show the deposit set off against the amount due.