HMRC increases unpaid IHT rate to 8.75%

The Chancellor Rachel Reeves announced her plan to increase the interest rate HM Revenue and Customs (HMRC) can charge on unpaid inheritance tax, increasing the rate by 1.5%, from 2.5% to 4% above the Bank of England base rate, to charge 8.75% per annum from April 2025.

Presented as a clampdown on tax avoidance, this change could add a significant increase in the monthly payments of bereaved families late in their inheritance tax bill cycle. For a household with an inheritance tax liability of £1m, the late repayment charges would amount to £87,500 a year, or nearly £1,700 of interest per week, payable to HMRC.

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The current system is that HMRC charges late payers by 2.5% interest on top of the Bank of England’s base rate, which fell to 4.75% as recently as last week. However, the new measures proposed in the Reeves’ Budget will raise the base charge to 4% in April 2025, raising an estimated £215m a year for HMRC by 2029-30, according to official figures.

Probate delays could cost bereaved families

As it stands, families have six months to pay inheritance tax after the death of a beneficiary before they become liable to pay any late payment charges. Many families require a grant of probate, which is the legal document used to access the deceased’s funds and take control over any assets they owned.

However, it currently takes an average of nine weeks to obtain a grant of probate, and in some more complex cases, it can take over a year. Recent reports have reported on delays in probate being granted as a result of a backlog at HMRC.  This means that families that for whenever reason cannot access the deceased’s assets within the deadline, may be getting hit with 8.75% tax per annum on their inheritance tax bill while they wait.

What is inheritance tax?

Inheritance Tax (IHT) is a tax levied by the Government on the estate of a deceased person in the UK. This includes all of their assets including property, personal belongings, and investments.

However, this levy only applies to the total value of the estate that exceeds the IHT threshold or ‘nil-rate band’. As of the 2024/25 tax year, the threshold is set at £325,000. Anything above £325,000 could be subject to up to 40% inheritance tax and anything below this threshold is tax-free.

In addition to the ‘nil rate band’ an individual may qualify for the £175,000 residence nil-rate band (‘RNRB’). This is available to those passing on a qualifying residence on death to their direct descendants. 
Any unused nil-rate band or residence nil-rate band following the death of an individual can be transferred to the surviving spouse or civil partner. This means that since 6 April 2020, qualifying estates have been able to pass on up to £500,000 and, if the nil-rate band and residence nil-rate band remain unused, the qualifying estate of a surviving spouse or civil partner is still able to pass on up to £1 million without an Inheritance Tax liability.

There were also new changes announced in the recent Budget with affects pensions and business. More details can be found here.

If you’re concerned about your inheritance tax bill and would like to ensure the best possible wealth protection for you or your family, we can help. Give us a call on 0333 323 9065 or book a free non-committal initial consultation with a member of our team to find out more.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.