A little-known process for paying inheritance tax is sending payments soaring for bereaved families thanks to the Bank of England.

The issue arises where a family has an inheritance tax (IHT) liability to pay after losing a loved one.

The Government, to give families the ability to pay the liability without being forced to sell the assets such as home, offers payment by instalment.

But there is a little-known caveat to this which is sending payments soaring for many.

Interest rate hikes from the Bank of England are hiking these IHT payments. Families are obliged to pay an interest rate of the Bank of England base rate plus 2.5%.

This means the rate of interest on the instalments is currently 4.25% – higher than some of the best loan rates on the market.

How do IHT instalments work?

When inheriting assets from a loved one, the Government allows bereaved families to pay the IHT due on the value of their home over 10 years in annual instalments.

If you sell the house, you have to pay the liability in full straight away. The first instalment is due within six months at the end of the month in which the death occurs.

For shares and other securities, families can pay the IHT liability in instalments if the person who has passed away controlled more than 50% of the company.

How to minimise IHT costs

HMRC has seen a year-on-year increase in the number of estates paying IHT. This is because while asset prices have grown steadily over time, the Government has frozen the thresholds for paying the tax.

This means families become subject to liabilities, purely because the value of their assets are increasing to a point over the threshold.

Fortunately, there are good wealth planning solutions to mitigate the costs of IHT with regards to property.

A single person has no IHT liabilities on the first £325,000 of their assets. With the addition of the residence nil rate band this rises to £500,000 if the asset in question is your main home.  The extra £175,000 is only available if the house (or its value) is being left to a direct descendant, (Children, Grandchildren, Adopted Children). So, if leaving to trust or to a sibling or nephew for example, it isn’t available. For a married couple this allowance effectively doubles to £1 million-worth of property if it is your main home.

However, once an estate reaches £2 million in value, the home allowance is removed by £1 for every £2 above the threshold. This effectively removes the allowance once an estate is worth over £2.3 million.

There are other strategies to help minimise the bill, including the way you structure assets, where you invest your wealth, and how you gift it away.

If you would like to discuss the themes in this article or would like more information on anything relating to inheritance tax, don’t hesitate to get in touch.