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Inheritance Tax Interest Rate Increases

09 January 2023

Interest rate changes related to overdue Inheritance Tax payments have been announced by HM Revenue & Customs (HMRC) and will soar to 6% from 6 January 2023.

In 2022, the interest rate charged was set at 2.75% representing less than 50% of the new charge introduced.This new increase is largely driven by base rate rises to help alleviate the current economic crisis.

HMRC has said that from 6 January 2023:

• Interest rate due to HMRC on late payment of IHT will be 6%; and

• the Interest rate paid to taxpayers who are due a refund for overpaid IHT will be 2.5%.

Inheritance Tax is normally due by the end of the sixth month after the event โ€“ typically, six months after the death of an individual, or six months after transfers into or out of a trust, known as โ€˜exit chargesโ€™. If IHT is not paid by that point, interest will start to be charged.

It is 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 too much is paid, HMRC will refund any excess plus interest, however the interest HMRC will pay on the overpayment is substantially lower, as indicated above at only 2.5%

British nationals can pay IHT on assets that may take time to sell in equal annual instalments over 10 years. However, they will have to pay interest โ€“ which is the new current rate of 6% on the outstanding balance.

IHT can be a complex planning issue

As IHT normally needs to be paid within six months it can be very difficult for many estates to be settled within this relatively short period.

In additional to these new rates, there is potential for these to increase further due to the general interest rate rises that are anticipated during 2023. Estate beneficiaries can elect to pay HMRC in advance, but many wonโ€™t have available assets to allow this to happen.

In addition and where IHT is due on assets which may take time to sell, such as the family home, it is possible to pay the bill in annual instalments over 10 years. This flexibility allows the family beneficiaries to keep the asset and pay the tax due gradually.

However, given the newly announced increases in interest rates this proposition becomes less attractive. IHT can be a complex area and thus individuals should seek financial advice to help work out the best outcome for their individual circumstances.

If you need to discuss your specific circumstances Please get in touch

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