Interest on Inheritance Tax paid in yearly instalments

If you choose to pay Inheritance Tax in instalments, you’ll pay once a year in ten equal instalments. Interest is charged on the total tax outstanding and is added to each instalment. If you don’t pay each instalment by the instalment due date, you’ll have to pay additional interest.

On this page:

When are the instalments due?
What interest rate is charged on instalments?
How interest is charged on instalments
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When are the instalments due?

You pay the first instalment on the ‘due date’ – the day you would have paid the full tax if you were paying it as a lump sum. This is exactly six months from the end of the month in which the person died. Interest starts from the following day. The table below shows how to work out the due date.

The next instalment is due exactly 12 months after this, on the same day, and the remaining instalments are due on the same day each year for the next eight years.

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

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What interest rate is charged on instalments?

See a full list of interest rates going back to October 1988

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How interest is charged on instalments

When you pay the first instalment, you’ll only pay interest if you pay the instalment after the due date. In this case HM Revenue & Customs (HMRC) will charge you interest on the first instalment only from the day after the due date to the day you pay. On each later instalment, it charges interest on both of the following:

the whole unpaid portion of the tax for one year
the instalment itself, from the date it’s due to the date of payment – but only if it’s paid after the due date

Each year, about four weeks before the instalment is due, HMRC will send you a statement showing the instalment due plus how much interest you need to pay. They will base this on the interest rates that applied during the year and apply them to the full outstanding balance of the Inheritance Tax to get the overall instalment payment due.

You can pay the full tax and interest due at any time.

However, if you choose to continue to pay by instalments, interest will be worked out on the outstanding balance and added to each instalment.

If you pay your instalment after the instalment due date, you’ll have to pay further interest on the instalment itself.

The calculation for working out the interest is:

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

Example

In this example, the first two instalments are paid after the due date, but the third one is paid on time. The deceased dies on 10 December 2005, so the due date for the first instalment is 30 June 2006. The Inheritance Tax due is £10,000. You’re expected to pay ten annual instalments of £1,000 each, plus interest, due on 30 June each year.

Instalment 1: Due 30 June 2006 but paid 12 September 2006

As this is the first instalment, you don’t pay any interest on the full outstanding tax. However, you do pay interest on the instalment itself because you’ve paid it a couple of months after the due date.

Interest on instalment paid after the due date, 1 July 2006 to 12 September 2006

From 1 July to 5 September 2006, 67 days at 3%
Interest due: £1,000 x 3% x 67/366 = £5.49
From 6 to 12 September 2006, 7 days at 4%
Interest due: £1,000 x 4% x 7/366 = £0.77
Total interest on the instalment: £5.49 + £0.77 = £6.26
Total payment to HMRC: £1,000 + £6.26 = £1,006.26

Instalment 2: Due on 30 June 2007 but paid on 19 September 2007

On this instalment, you pay interest on the full outstanding tax, as well as interest on the instalment payment itself, because it was again made a couple of months after the due date.

Interest on the full outstanding tax of £9,000, 1 July 2006 to 30 June 2007

From 1 July to 5 September 2006, 67 days at 3%
Interest due: £9,000 x 3% x 67/366 = £49.43
From 6 September 2006 to 30 June 2007, 298 days at 4%
Interest due: £9,000 x 4% x 298/366 = £293.11
Total interest on the full outstanding tax: £49.43 + £293.11 = £342.54
Total instalment payment due to HMRC: £1,000 + £342.54 = £1,342.54

Interest on instalment paid after the due date, 1 July to 19 September 2007

From 1 July to 5 August 2007, 36 days at 4%
Interest due: £1,000 x 4% x 36/366 = £3.93
From 6 August to 19 September 2007, 45 days at 5%
Interest due: £1,000 x 5% x 45/366 = £6.15
Total interest on the instalment: £5.28 + £8.07 = £10.08
Total payment to HMRC: £1,342.54 + £10.08 = £1,352.62

Instalment 3: Due and paid on 30 June 2008

You only pay interest on the full outstanding tax because the instalment was paid on time.

Interest on the full outstanding tax of £8,000, 1 July 2007 to 30 June 2008

From 1 July to 5 August 2007, 36 days at 4%
Interest due: £8,000 x 4% x 36/366 = £31.47
From 6 August 2007 to 5 January 2008, 153 days at 5%
Interest due: £8,000 x 5% x 153/366 = £167.21
From 6 January to 30 June 2008, 177 days at 4%
Interest due: £8,000 x 4% x 177/366 = £154.75
Total interest on the full outstanding tax: £31.46 + £167.21 + £154.74 = £353.43
Total payment to HMRC: £1,000 + £353.43 = £1353.43

It can be complicated to work out the right amount of interest. If you need help, call the Probate and Inheritance Tax Helpline.

Contact the Probate and Inheritance Tax Helpline

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