How do Inheritance Tax instalment plans work?
If you’re considering an Inheritance Tax instalment plan, this guide explains how HMRC’s 10-year option works, which types of assets qualify, the interest you can expect, and when instalment schemes can be turned down.
HMRC’s 10‑year instalment terms
HMRC offers a 10-year instalment scheme only when most of the tax due is tied up in assets that cannot be quickly turned into cash. Qualifying cases include estates with property, unquoted company shares, certain business assets, or agricultural land.
Under this scheme, you must pay 10% of the tax by the sixth month after death, usually the deadline, followed by annual payments of the balance plus interest. This allows time to sell or release funds after probate without facing immediate financial strain. HMRC will only agree if limited cash is genuinely available and there's a reasonable timeline to pay the remainder.
What assets qualify?
To use the instalment option, the estate must include assets like:
- Land or residential property;
- Unlisted shares in a trading company;
- Qualifying business interests;
- Agricultural property or timber.
Assets such as bank savings or investment policies do not qualify; these must first be used to pay the tax before instalments are permitted.
When plans are rejected
HMRC might refuse a request for instalments if:
- The estate holds sufficient readily available funds to pay the full tax.
- No genuine plan exists to raise the remaining tax.
- Executors cannot show they have used available assets like bank accounts or saleable investments first.
Without a solid repayment strategy or evidence that assets are difficult to liquidate, HMRC may require immediate payment instead.
Example scenario
Imagine the estate includes a property worth £500,000 but minimal cash. The total IHT due is £100,000. The Executor could pay £10,000 (10%) by the deadline and then pay £10,000 each year for up to ten years, plus interest. If interest is charged at 7.5%, the total cost of using instalments might significantly exceed a lump sum payment. Over time, interest on the outstanding balance makes instalments more costly, so paying more upfront reduces total interest and estate administration time.
In summary
The Inheritance Tax instalment scheme can help Executors manage large tax bills when most assets are illiquid. It offers breathing space while property or business interests are settled. However, it includes interest charges, requires evidence that cash is unavailable, and must meet HMRC’s strict criteria. If you're considering this option, getting professional advice from a Probate Solicitor or Accountant will ensure you meet requirements and understand the long-term implications for the estate.