When Do You Pay Inheritance Tax?

When managing an estate that owes Inheritance Tax (IHT), adhering to deadlines and following the correct procedures is crucial to avoid penalties and ensure smooth processing. Here are the key steps and deadlines you need to be aware of:

Inheritance Tax (IHT) is a tax on the estate of someone who has passed away, including their property, money, and possessions. Understanding when Inheritance Tax is due, the process for paying it, and the associated deadlines is crucial for executors and beneficiaries. This article will guide you through when you need to pay Inheritance Tax in the UK, including deadlines, payment methods, and strategies to manage your tax obligations effectively.

Inheritance Tax is levied on the estate of a deceased person. The tax is charged at 40% on the portion of the estate's value that exceeds the IHT threshold, also known as the nil-rate band. As of the 2024/2025 tax year, the standard nil-rate band is £325,000. An additional Residence Nil-Rate Band (RNRB) of £175,000 may apply if the deceased's main residence is passed to direct descendants.

When is Inheritance Tax Due?

Inheritance Tax must be paid by the end of the sixth month after the person's death. For example, if the person died in January, the tax would be due by the end of July. If the tax is not paid by this deadline, HM Revenue and Customs (HMRC) will charge interest on the amount due.

Key Deadlines for Paying Inheritance Tax

• Six Months After Death: IHT must be paid by the end of the sixth month after the person's death. This is the primary deadline for payment.

• Interest Charges: If IHT is not paid within this period, interest will start to accrue on the outstanding amount.

• Filing Inheritance Tax Forms: The relevant IHT forms must also be submitted within a year of the person's death.

Methods of Paying Inheritance Tax

There are several ways to pay Inheritance Tax, each with specific procedures and options to consider:

1. Direct Payment Scheme (DPS):

   • How it Works: The DPS allows banks and building societies to pay IHT directly from the deceased’s account.

   • Steps: The executor needs to submit a Direct Payment Scheme form (IHT423) to the bank or building society, along with a copy of the IHT400 form (the main form for reporting IHT).

   • Advantages: This method can be quick and avoids the need to wait for probate.

2. Cheque or Bank Transfer:

   • Payable to: HM Revenue and Customs.

   • Details Required: Include the IHT reference number and account number.

   • Address for Cheque Payments: HM Revenue and Customs, BX9 1HT, United Kingdom.

   • Bank Details for Transfers: Sort code: 08-32-10, Account number: 12001020, Account name: HMRC Cumbernauld.

3. Instalments:

   • Eligibility: Available for paying IHT on certain assets, such as property, shares, and businesses.

   • Duration: Typically spread over ten annual instalments.

   • Interest: Interest is charged on the unpaid tax from the due date.

   • First Instalment: The first instalment is due at the end of the sixth month after death, with subsequent instalments due annually.

Strategies to Manage Inheritance Tax Payments

1. Early Payment:

   • Advantage: Paying IHT early can reduce interest charges and ease the financial burden on beneficiaries.

   • How: Use the DPS for quick access to the deceased’s funds.

2. Use of Life Insurance:

   • How: Taking out a life insurance policy written in trust can provide funds to cover the IHT bill.

   • Benefits: Ensures funds are available to pay IHT without depleting the estate’s assets.

3. Gifts and Trusts:

   • Lifetime Gifts: Gifts made more than seven years before death are exempt from IHT.

   • Trusts: Placing assets in a trust can help manage IHT liabilities, provided certain conditions are met.

What Happens if You Cannot Pay Inheritance Tax?

If you are unable to pay the full amount of IHT by the due date, it is essential to contact HMRC as soon as possible. HMRC may agree to a payment plan under certain circumstances. Here are steps to take if you cannot pay:

1. Contact HMRC: Explain your situation and discuss potential payment arrangements.

2. Consider Instalments: If eligible, apply to pay IHT in instalments.

3. Seek Professional Advice: Consult with a tax advisor or solicitor to explore all available options and ensure compliance with HMRC requirements.

Conclusion

Inheritance Tax is a significant consideration for those dealing with the estate of a deceased person. Understanding the deadlines, payment methods, and strategies to manage IHT is crucial for executors and beneficiaries. By planning ahead, using available payment options, and seeking professional advice, you can effectively manage the financial responsibilities associated with Inheritance Tax. This ensures that the estate is settled efficiently, and beneficiaries receive their inheritance with minimal stress and financial strain.

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