People who opt to pay inheritance tax in instalments to avoid selling the family home are being walloped by the recent interest rate hikes.
They are now forced to fork out 3.75 per cent – the Bank of England base rate plus 2.5 per cent – if they choose to spread payments to the taxman over up to 10 years.
After four base rate rises this year and potentially more to come, the cost of paying off an inheritance bill this way will become too expensive for some families, according to financial services group NFU Mutual.
Inheritance tax: Families often sell the family home to pay the taxman, but you can opt do this more slowly if you want to hang onto the property – or other assets deemed to take ‘time to sell’ – if you are willing to fork out the interest
‘The ability to pay inheritance tax on property over 10 years allows bereaved families to hold onto the family home that might otherwise need to be sold,’ says Sean McCann, chartered financial planner at NFU.
‘Over recent years families who have opted to pay by instalments have benefited from house price growth that has outstripped the rate of interest charged by HMRC.
‘As the cost of HMRC interest payments rises, many of those same families will find the payments unaffordable.’
How much is inheritance tax and who pays?
You need to be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, for your loved ones to have to stump up death duties.
But there is a further chunky allowance – known as the residence nil rate band – which increases the threshold to a joint £1million if you have a partner, own a property, and intend to leave money to your direct descendants.
Once an estate reaches £2million this own home allowance starts being removed by £1 for every £2 above this threshold. It vanishes completely by £2.3million
If you are worth more than this, your heirs will have to hand over 40 per cent of your assets above those levels to the Government.
McCann adds: ‘Some families will be reluctant to take on what is effectively a variable rate loan from HMRC and will feel forced to sell.’
Headline inflation hit 9.4 in June and the Governor of the Bank of England, Andrew Bailey, has hinted a 0.5 percentage point interest rate rise to 1.75 per cent could be on the way.
This would push HMRC’s interest rate on inheritance tax instalments to 4.25 per cent.
Meanwhile, HMRC has recently seen a spike in inheritance tax receipts, with a 19 per cent rise to £1.8billion between April and June compared with the same period last year – a trend blamed on rising house prices.
McCann says: ‘Inheritance tax normally needs to be paid within six months and executors can’t get probate and release the estate to the family until the bill is paid.
‘They often need to borrow money to pay the bill, which can be expensive, and, in many cases, families feel forced to sell the family home quickly to repay the loan.’
Opting to pay the bill in 10 equal annual instalments therefore allows a family to keep the property if they prefer, he explains.
How to pay IHT in instalments: What are the rules?
Sean McCann of NFU Mutual offers the following guide.
– The first instalment is due within six months of the end of the month in which death occurs
– There is no interest on the first instalment
– The following instalments are due annually on the anniversary of that date
– HMRC charge interest on the outstanding inheritance tax balance at base rate plus 2.5 per cent
– Each annual payment will include interest on the outstanding balance
Sean McCann:Over recent years families who have opted to pay by instalments have benefited from house price growth that has outstripped the rate of interest charged by HMRC
– Families can change their mind at any point and pay the full amount of inheritance tax due
– If the property is sold the right to pay by instalments ceases and the full balance becomes due
– This is also the case if a mortgage is taken out on the property or if it is used as security for a loan
– If a house you received as a gift subsequently becomes chargeable for inheritance tax because the person who gave it to you dies within seven years, you may also be able to pay any inheritance tax due by instalments.
Meanwhile, McCann notes that if you are owed money by HMRC, it pays interest of the base rate minus 1 per cent, with a lower limit of 0.5 per cent.
As the base rate is currently 1.25 per cent, this lower limit – known as the ‘minimum floor’ – kicks in, he explains.
So, HMRC pays interest of 0.5 per cent but charges interest of 3.75 per cent at present.
What are the pros and cons of paying off an inheritance tax bill more slowly?
Shaun Moore, tax and financial planning expert at Quilter gives his take below.
You might opt to pay inheritance tax in instalments on items deemed to take ‘time to sell’ simply because you don’t have enough available (liquid) cash to pay the full bill when it’s due and/or because the item is to be retained by a beneficiary so there is no intention or desire to sell.
This can cover a variety of asset types but one of the most common is the family home. HMRC allow you to pay 10 per cent plus the interest each year over 10 years in this example.
Advantages:One of the benefits of paying in instalments, beyond retaining the asset, is that it takes the pressure of paying often hefty bills quickly.
Often executors who lack liquidity within the estate turn to short term loans (often referred to as bridging loans) to fund the inheritance tax liability.
This can come with high rates of interest compared to longer term lending and there needs to be a plan to repay the loan at a future point. By taking the pressure away, assets (which are not to be retained) within the estate can be sold for their full market value.
Disadvantages: Arranging payment in instalments doesn’t come without drawbacks. Interest is still payable to HMRC on the second and all subsequent instalments on the full balance of the outstanding tax as well as on any instalments that are not paid on time.
This means you may end up paying a lot more in tax over a 10-year period than if you had paid the inheritance tax all at once but sometimes this simply isn’t possible.
The interest rate is currently 3.75 per cent which although it may be attractive compared with bridging loans, makes it worth paying off the debt sooner rather than later if possible.
If the asset which allows the inheritance tax to be paid in instalments is sold (for example, house or shares) then the full outstanding balance of the tax must be paid.
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As a financial expert with extensive knowledge in taxation and estate planning, I can provide valuable insights into the topic discussed in the article. The issue revolves around families opting to pay inheritance tax in instalments to retain assets such as the family home, especially with recent interest rate hikes impacting the cost of this strategy.
Firstly, the article mentions the current interest rate for paying inheritance tax in instalments, which is 3.75%—comprising the Bank of England base rate plus 2.5%. Given that the Bank of England base rate has seen four rises in the year, and more are anticipated, the cost of using this payment method is becoming burdensome for some families, according to financial services group NFU Mutual.
The article underscores the importance of paying attention to the interest rates charged by HMRC (Her Majesty's Revenue and Customs) when choosing to spread inheritance tax payments over a decade. Sean McCann, a chartered financial planner at NFU Mutual, emphasizes that the ability to pay inheritance tax over ten years allows families to retain the family home that might otherwise need to be sold. However, with the rising cost of HMRC interest payments, many families may find these payments unsustainable.
The article also provides a brief overview of inheritance tax and who is required to pay it. Individuals with a net worth of £325,000 (or £650,000 jointly for married couples or those in civil partnerships) are subject to inheritance tax. There is an additional allowance, the residence nil rate band, which increases the threshold to £1 million for couples who own a property and intend to leave money to their direct descendants. The article mentions that if an estate surpasses £2 million, the own home allowance starts diminishing.
Sean McCann outlines the potential consequences of the interest rate hikes, stating that families may be reluctant to take on a variable-rate loan from HMRC and may feel compelled to sell their assets, including the family home, to cover the inheritance tax bill. The article touches upon the recent spike in inheritance tax receipts, attributing it to the increase in house prices.
For those considering paying inheritance tax in instalments, Sean McCann provides a guide on the rules. The first instalment is due within six months of the death, with subsequent instalments annually on the anniversary of that date. HMRC charges interest on the outstanding balance at the base rate plus 2.5%. Families have the flexibility to change their minds and pay the full amount at any point, but if the property is sold or used as security for a loan, the right to pay in instalments ceases, and the full balance becomes due.
Finally, the article includes insights from Shaun Moore, a tax and financial planning expert at Quilter, who weighs the pros and cons of paying off an inheritance tax bill slowly. While paying in instalments allows families to retain assets and eases the pressure of hefty bills, it comes with the drawback of accruing interest on the outstanding tax balance. Moore suggests that, despite the current interest rate being 3.75%, it may be worth paying off the debt sooner rather than later to avoid paying more in tax over the ten-year period. If the asset used to pay in instalments is sold, the full outstanding balance must be paid immediately.
In conclusion, the article covers various aspects of inheritance tax, payment methods, and the impact of interest rate hikes on families' ability to retain assets such as the family home. The information provided offers a comprehensive understanding of the challenges and considerations involved in managing inheritance tax liabilities.