Inheritance tax question

Mrs_Bargain_Hunter

i have had a query from a friend and she's rung HMRC three times but not got an answer.

 i have 500k to pay in 10 instalments over 10 years.

There is interest to pay on the instalments

I have paid the first instalment 50K, but not the interest due with the first instalment, which is around 40K.

If I pay more, before the next instalment is due, what effect does that have on the total that I will end up paying, does it decrease or is it unaffected?

If it is unaffected, it seems there is no point in repaying earlier.

poseidon1

Your friend seems to have taken an extremely long time to be assessed on the 1st instalment.

The 1st instalment is due 6 months after death, and only if paid after that date will there be any interest arising. See guidance below :

https://www.gov.uk/paying-inheritance-tax/yearly-instalments

For £40k interest to arise on only £50k 1st instalment means there were problems agreeing the IHT due and years passed before the instalment assessment was raised.  

Refusal to pay the interest charge will make your friend delinquent with HMRC, penalties may arise and worse case scenario HMRC's debt management office get involved potentially leading to cancellation of instalment  option and proceedings to recover the entire liabilty.

Your friend should also be aware that the interest calculation on the 2nd Instalment is on the liabilty after deducting £50 k  instalment paid ie £450k. Therefore interest is already running at 7.75% on this amount. If the rate remains unchanged that could easily trigger additional interest for the year exceeding £34k. An accumulating debt mountain.

I would have expected with such a large IHT bill, your friend was professionally advised, if not then she should  urgently seek advice from a Chartered tax accountant who can review the current arrangements and reccomend appropriate course of action to avoid your friend getting into very hot water with HMRC.

Mrs_Bargain_Hunter

Thank you poseidon1 said - she has made a complaint about her solicitor who failed to provide a letter that he received from HMRC in December last year until September, which detailed the instalments and interest. Death was April 2024. She was led to believe that the interest was £6K on £60,000 instalments - he never showed her the letter to make her understand the instalments:

Your friend seems to have taken an extremely long time to be assessed on the 1st instalment.

The 1st instalment is due 6 months after death, and only if paid after that date will there be any interest arising. See guidance below :

https://www.gov.uk/paying-inheritance-tax/yearly-instalments

For £40k interest to arise on only £50k 1st instalment means there were problems agreeing the IHT due and years passed before the instalment assessment was raised.  

Refusal to pay the interest charge will make your friend delinquent with HMRC, penalties may arise and worse case scenario HMRC's debt management office get involved potentially leading to cancellation of instalment  option and proceedings to recover the entire liabilty.

Your friend should also be aware that the interest calculation on the 2nd Instalment is on the liabilty after deducting £50 k  instalment paid ie £450k. Therefore interest is already running at 7.75% on this amount. If the rate remains unchanged that could easily trigger additional interest for the year exceeding £34k. An accumulating debt mountain.

I would have expected with such a large IHT bill, your friend was professionally advised, if not then she should  urgently seek advice from a Chartered tax accountant who can review the current arrangements and reccomend appropriate course of action to avoid your friend getting into very hot water with HMRC.

poseidon1

If the 1st instalment was due in September in 2024, there is absolutely no way £40,000 of interest accrued on a £50,000 first instalment paid late ( the figures in your original post). Even at an interest rate of say 8% that would only accrue interest of  £4,000 for an entire year to date. No where near the £40,000 you intially mentioned ( unless you were mistaken!).

If you have not physically seen the IHT assessments yourself, I  have to  assume your friend  is extremely confused with what she is telling you, or there is something very wrong with communications she has been receiving from the solicitor.

At this point  I reiterate my reccomendation  that she must seek  the services of a Chartered Tax Accountant ( not a solicitor) ASAP to review all her HMRC paper work to advise going forward and whether she has a prima facie case for compensation from the solicitor  for unnecessary HMRC interest  accruing on the first instalment paid late.

With all due respect your friend is out of her depth here, and needs an independent 2nd opinion and guidance.

Keep_pedalling

poseidon1 said:

If the 1st instalment was due in September in 2024, there is absolutely no way £40,000 of interest accrued on a £50,000 first instalment paid late ( the figures in your original post). Even at an interest rate of say 8% that would only accrue interest of  £4,000 for an entire year to date. No where near the £40,000 you intially mentioned ( unless you were mistaken!).

If you have not physically seen the IHT assessments yourself, I  have to  assume your friend  is extremely confused with what she is telling you, or there is something very wrong with communications she has been receiving from the solicitor.

At this point  I reiterate my reccomendation  that she must seek  the services of a Chartered Tax Accountant ( not a solicitor) ASAP to review all her HMRC paper work to advise going forward and whether she has a prima facie case for compensation from the solicitor  for unnecessary HMRC interest  accruing on the first instalment paid late.

With all due respect your friend is out of her depth here, and needs an independent 2nd opinion and guidance.

There should be no interest on the first instalment provided is was paid on time, but it wasn’t so it is applicable and it applies to the full outstanding amount not just the first instalment.

Paying by installments is useful if you need to sell illiquid assets, but at 8% interest you would be foolish not to sell of some of those assets ASAP to clear the full amount to minimise the total interest that needs paying. 

https://www.gov.uk/paying-inheritance-tax/yearly-instalments#:~:text=You%20will%20not%20pay%20any,payment%20(if%20it's%20paid%20late)

poseidon1

Based on Keep_pedalling's research it is now apparent why the interest bill is so colossal. At an average interest rate of 8% on the entire £500k IHT bill, that would certainly trigger a £40k interest bill.

Had she paid the September 2024 instalment in time that would have avoided interest on that amount, but 1 years  interest would still have accrued on £450k to September 2025.

As of now , your friend should have paid 2 instalments of £50 k each plus the interest demanded of £40k, leaving a balance of £400k to accrue interest for the coming year.

However, as pointed out by Keep_pedalling, the IHT instalment option is expensive. If your friend has the resources to settle the outstanding amount, this would be strongly reccomended. Was there a specific reason for opting for the instalment option and did it relate to an inherited home or another eligible asset?.