The increasing cost of dying

As everyone is aware, interest rates are on the way up. However, not everyone realises that rising interest rates are also hitting bereaved families through the increasing cost of dying.

The Bank of England’s Monetary Policy Committee recently announced a thirteenth consecutive rise in the official base rate, to 5%. The impact of this on Britain’s mortgage payers has been well documented in the media.

What inheritance tax is due and when?

When someone dies and their taxable estate is in excess of the available nil rate band or bands, inheritance tax (IHT) at 40% is payable on the balance. How quickly the tax can be paid after death depends on the composition of the deceased’s estate, but frequently there are insufficient liquid assets available to cover all of the tax due.

If any part of the IHT remains unpaid six months after the end of the month in which death occurred, then interest begins to run on the unpaid tax.

Hence, if the person died on (say) 27 March 2023, interest would start running from 1 October 2023. 

The interest rate charged by HM Revenue & Customs (HMRC) on unpaid tax has been rising remorselessly, in line with the rises in base rate. In fact, it gets worse, because HMRC doesn’t limit itself to charging interest at the official base rate – instead, it charges a premium, in other words base rate plus 2.5%.

So, the current rate of interest on unpaid IHT is 7.5% per annum, and this only seems likely to increase.

If you pay too much tax and HMRC have to refund you, they will pay you interest on the overpaid sum, but only at the much lower rate of 4%.

The real sting in the tail, though, is that both HMRC and the probate registry are taking much longer than usual to process routine paperwork, including the probate applications required to release assets and allow IHT to be paid. This, in itself, is likely to mean that bereaved families, through no fault of their own, are unable to settle the whole of the tax bill in time to prevent interest starting to run.  

Resistance is futile

The delays at HMRC and the probate registry are well-documented in the press (try Googling “long probate delays”). However, the attitude of HMRC is completely inflexible and they make no allowances whatsoever for these delays when calculating the interest owed to them. As far as HMRC are concerned, the reasons for non-payment or delayed payment of IHT are irrelevant and they will resist any claim for a reduction in the interest payable, their rationale being that they are entitled to be compensated for not having had all their money the day it was due. 

Lessons to be learnt by executors

Many taxpayers might understandably think it unfair that HM Treasury, by levying premium rates of interest on unpaid tax, is profiting from the inefficiency and mismanagement of its fellow Government departments.  However, there is no sign of this changing anytime soon. 

The lessons to be learnt by executors (and their professional advisors) are, firstly, to get moving quickly with the probate application after a loved one dies, so that avoidable delays are prevented, even if nothing can be done about the delays in the official machinery for processing probate applications. 

More information on probate can be found here – What is probate and when is it needed?

Secondly, arrange payments on account of IHT as soon as an estimate of the total tax bill is available – it is now possible to arrange for banks and building societies with which the deceased held deposits to make direct payments to HMRC, and this will usually be well worth while in terms of the interest saved. In some cases, it may even make sense for the residuary beneficiaries of the estate to pitch in and lend the estate the money needed to cover the IHT.          

How Moore Barlow can help

We are specialist and compassionate professionals committed to providing you with the right support. With a team of highly specialist and experienced lawyers, we can help make the process run smoothly minimising complications. We take sensitivity into account just as much as legal advice, as we understand the difficult nature of the situation and how this can affect you.

As specialist probate lawyers, we have the correct systems in place to deliver real efficiencies and reduce cost.