Is Inheritance Tax interest a stealth tax?

Considering Inheritance Tax when someone dies 

When a person dies, one of the most important things to consider is if their estate is subject to Inheritance Tax. Once this has been established, the executor needs to consider how the Inheritance Tax is to be paid. If the Inheritance Tax bill is relatively small and you have access to the deceased’s bank account, sometimes the Inheritance Tax can be settled straight away. However, most assets of significant value, such as bank accounts over £30,000, shares, investments or properties require a Grant of Probate to cash in or sell. This can present a problem for executors when there is not enough easily accessible cash to pay the entire Inheritance Tax bill upfront. In these situations, some Inheritance Tax might be paid off soon after death, but the rest will need to wait until the Grant of Probate is obtained.  

Getting Probate before Inheritance Tax interests kicks in 

If the Inheritance Tax bill cannot be settled within the first 6 months after death, then the executor needs to consider the Inheritance Tax interest. Inheritance Tax interest starts to accrue from the end of the 6^th month after death. 

This has been the rule for many years and has not been a contentious issue until recently. In the past, a Grant of Probate could be obtained in a few weeks and assets cashed in/sold very quickly thereafter. However, recent restructuring of the procedure has created a significant backlog of applications at both the Probate Registry and HM Revenue & Customs (HMRC). 

For taxable estates, before you can apply for the Grant of Probate you need a unique code from HMRC. This requires submitting your Inheritance Tax forms and waiting a minimum of four weeks. In practice, this can take longer, especially in complex cases. Once you have your unique code, you will have to contend with the significant Probate Registry wait times. Their official timescales are now 16 weeks, but for any application they classify as slightly complex under the new rules, we are seeing wait times of up to 6 months or more. This means that even if you apply for Probate very soon after the death, you may not have it within the 6-month Inheritance Tax interest deadline. 

Changes needed to Inheritance Tax interest  

Inheritance Tax interest is currently at 7.75% and it accrues daily until paid off. This relatively high rate, coupled with the delays at both the Probate Registry and HMRC, have led some to label Inheritance Tax interest as a ‘stealth tax’ or ‘double tax’. The longer the Probate Registry and HMRC take to process applications, the more Inheritance Tax interest the government collects in. 

The key issue is that the 6-month deadline was set in a time when it was very possible to have your Grant of Probate well within this period. It would be interesting to see the statistics of how many more estates are paying interest now versus five years ago. Whilst the government may not be inclined to lower the interest rates, they could certainly extend the 6-month deadline to a more reasonable and achievable 12 months. From a commonsense perspective, it does not seem fair or reasonable that interest can accrue on amounts that the estate has no ability to pay due to the delays and issues at both the Probate Registry and HMRC. 

What can you do? 

Inheritance Tax interest is now a more serious issue for executors and should be considered very early on in the estate administration process. A solicitor can help you manage the risks and explain ways of accessing estate funds before Probate is granted. Unfortunately, until the government takes action to either fix the issues at the Probate Registry and HMRC or increase the 6-month deadline, more and more estates will be paying interest on assets they cannot access.  

Are you processing the death of a loved one, and need help navigating probate and inheritance tax? Contact our Private Client solicitors for expert advice on all aspects of estate administration.