Can I Pay Inheritance Tax in Instalments?

Introduction

Inheritance Tax (IHT) can be one of the largest tax bills a family faces, especially when most of an estate’s value is tied up in property or other non-cash assets. When this happens, paying the full amount in one go can be difficult.

Fortunately, HMRC allows Inheritance Tax to be paid in instalments in certain circumstances. This can give beneficiaries and executors time to sell assets or release funds without the pressure of immediate payment. This article explains when instalments are allowed, how they work, and what to watch out for.

When You Can Pay Inheritance Tax in Instalments

You can usually pay Inheritance Tax in instalments if the estate includes assets that cannot easily be sold straight away, such as:

• Land or property (for example, a family home or farmland)

• Shares or securities not listed on the stock exchange

• A controlling shareholding in a business

• Certain business or partnership interests

If the tax due relates to these assets, HMRC may allow payment over 10 annual instalments.

However, if the estate mainly consists of cash, bank savings, or other liquid assets, HMRC will normally expect the full tax to be paid within six months of the date of death.

How Instalment Payments Work

When paying in instalments, you must first decide whether to pay:

1. Only the tax relating to qualifying assets in instalments, or

2. The entire IHT bill this way, if the majority of the estate is eligible.

Here is how it typically works:

• The first instalment is due by the normal IHT deadline, which is six months after the end of the month of death.

• The remaining instalments are paid annually on the same date for up to nine more years.

• You can pay off the remaining balance early at any time without penalty.

Interest is charged by HMRC on the unpaid balance, so the longer the instalment plan lasts, the more interest will accrue.

Example Scenario

Let’s say an estate includes a property worth £600,000 and other assets worth £200,000. The total IHT liability is £140,000, of which £100,000 relates to the property.

The executor can:

• Pay £40,000 immediately (the part relating to liquid assets).

• Pay the £100,000 for the property over 10 years in equal instalments of £10,000 plus interest each year.

If the property is later sold, the remaining IHT must be paid in full at that time, even if the instalment plan has not finished.

Paying Interest on Instalments

HMRC charges interest on the outstanding balance of any IHT paid in instalments. The interest rate changes periodically and is typically higher than standard bank savings rates.

Interest is only charged on the portion of tax still unpaid, not on amounts already settled. For example, if you make an early repayment, future interest will be calculated on a smaller balance.

How to Apply to Pay Inheritance Tax in Instalments

To apply for an instalment arrangement, the executor or administrator should:

1. Complete the Inheritance Tax account (IHT400) form, including the section requesting instalment payments.

2. Provide details of which assets qualify for instalments and the tax relating to each one.

3. Send the completed forms to HMRC for approval.

HMRC will then confirm whether instalment payments are allowed and provide a payment schedule. You can also contact HMRC’s Inheritance Tax and Probate Helpline for advice before submitting the forms.

When You Must Pay the Remaining Tax Immediately

You must pay the full outstanding IHT balance immediately if:

• The asset being paid for in instalments is sold or transferred.

• The executor or beneficiaries choose to pay early to stop further interest.

• The estate generates enough cash to settle the bill in full.

For example, if the property in the instalment plan is sold three years after death, all remaining tax and interest must be paid straight away.

What Happens If You Miss a Payment

If instalments are not paid on time, HMRC can charge:

• Late payment interest on overdue amounts, and

• Penalties for persistent non-payment.

To avoid these charges, it is important to keep up with the payment schedule or contact HMRC if you expect a delay. They may agree to a revised plan if there are reasonable grounds.

Paying Inheritance Tax from the Estate

Executors can use funds from the estate to pay IHT instalments, such as:

• Income from rent or dividends generated by estate assets

• Proceeds from asset sales

• Bank or investment account withdrawals

If there are multiple beneficiaries, the payments may be apportioned according to the value of their share in the estate.

Reducing or Avoiding Inheritance Tax

While paying IHT in instalments can ease financial pressure, it is better to plan ahead to reduce the overall tax bill. Strategies include:

• Making lifetime gifts: Gifts made more than seven years before death are usually exempt.

• Using allowances: Every person has a £325,000 nil-rate band and potentially a £175,000 residence nil-rate band for a main home passed to direct descendants.

• Claiming business or agricultural relief: Certain business and farming assets may qualify for up to 100% IHT relief.

• Setting up trusts: These can help manage assets and control when tax becomes due.

The Role of an Accountant or Adviser

An accountant can help you:

• Determine whether instalments are available for your specific estate.

• Calculate interest and future payments.

• File the correct HMRC forms on time.

• Explore IHT planning strategies to minimise future liabilities.

Professional advice ensures you make the right decisions and stay compliant with HMRC rules.

Conclusion

Yes, it is possible to pay Inheritance Tax in instalments, but only for certain types of assets such as property, shares, or business interests that cannot easily be sold. You can spread payments over up to 10 years, with interest charged on the outstanding balance.

If the asset is sold, the remaining tax must be paid in full. Executors should apply through the IHT400 form and communicate with HMRC early to arrange the instalment plan. With careful planning and professional support, paying Inheritance Tax in instalments can make the process more manageable and reduce financial stress during estate administration.