Paying UK Inheritance Tax in Instalments: Which Assets Qualify for Deferred Payment

When a UK estate faces an Inheritance Tax (IHT) bill, the default rule requires payment within six months of the end of the month in which the person died (HMRC, Inheritance Tax Manual, IHTM14563). Failure to meet this deadline triggers interest charges, which as of the 2024/25 tax year stand at 7.75% per annum on overdue tax — the highest rate since 2001 (HMRC, Interest Rates for Late Payments, 2024). However, for estates that are largely illiquid, this six-month window can create severe cash-flow pressure, forcing executors to sell assets at distressed prices or borrow at punitive rates. To address this, UK legislation allows certain categories of assets to qualify for a deferred payment of IHT in instalments under the Inheritance Tax Act 1984, Sections 227–229. This option permits the tax attributable to qualifying assets to be spread over ten equal annual instalments, with the first payment due six months after the normal due date. The relief is not automatic; executors must make a formal election to HMRC, and the rules differ sharply between land, businesses, and other asset classes. Understanding which assets qualify — and crucially, which do not — can mean the difference between a manageable probate process and an unnecessary forced sale. This article explains the qualifying criteria, the mechanics of the instalment option, and the common pitfalls that executors and beneficiaries face.

Land, Buildings, and Agricultural Property

The most common category of asset that qualifies for IHT instalment payments is land and buildings. Under Section 227 of the Inheritance Tax Act 1984, any interest in land — whether residential, commercial, or agricultural — qualifies for the instalment option, provided the tax is attributable to that specific asset. This includes the deceased’s main residence, buy-to-let properties, farmland, and commercial premises. The key advantage is that the tax can be spread over ten annual instalments, with interest only charged on the outstanding balance of each instalment after the first payment date.

It is important to note that the instalment option applies to the IHT attributable to the land, not the entire estate’s tax bill. For example, if Mrs X’s estate consists of a house valued at £800,000 and cash of £200,000, only the tax on the house can be deferred. The tax on the cash must be paid within the standard six-month window. Interest on the deferred instalments is charged at the HMRC late payment rate (currently 7.75%) from the normal due date, but for certain assets — such as agricultural property or woodlands — the interest may be deductible for income tax purposes. Executors should also be aware that if the property is sold before all instalments are paid, the entire outstanding balance becomes due immediately.

Business Assets and Unlisted Shares

A second major category of qualifying assets is business property, including sole trader businesses, partnerships, and controlling shareholdings in unlisted companies. Under Section 228 of the Inheritance Tax Act 1984, the instalment option is available for tax attributable to business assets or unlisted shares where the deceased held a controlling interest (more than 50% of the voting rights). For non-controlling holdings of unlisted shares, the option is only available if the value of the shares exceeds £20,000 and the shares represent at least 10% of the total value of the estate’s net assets.

The rules for business assets are particularly valuable because they allow the estate to preserve the business as a going concern rather than forcing a sale to meet the tax bill. For instance, Mr Y, a sole trader running a manufacturing company valued at £1.5 million, could defer the IHT on that business over ten years. This gives the family time to restructure, find a buyer, or generate profits to pay the tax. However, the instalment option does not apply to shares listed on a recognised stock exchange (such as the London Stock Exchange), because those can be sold quickly. Interest on deferred business asset instalments is also charged at the standard late payment rate, and if the business is sold or the shares are transferred to a non-qualifying person, the full balance becomes payable.

What Does NOT Qualify for Instalments

Understanding the exclusions is as important as knowing the inclusions. Cash, bank accounts, listed shares, and personal chattels (such as jewellery, cars, or artwork) do not qualify for the instalment option. The rationale is straightforward: these assets are liquid and can be sold or converted to cash within the six-month payment window. Similarly, life insurance policy payouts made directly to beneficiaries (outside the estate) are not subject to IHT instalments because the tax is typically paid by the estate, not the policy.

A common misstep occurs with jointly owned property. If the deceased held property as a joint tenant (with the right of survivorship), the property passes automatically to the surviving joint owner and does not form part of the estate for probate. In that case, the instalment option cannot be elected because the asset is not within the estate’s control. However, if the property was held as tenants in common, the deceased’s share forms part of the estate and qualifies for instalments. Executors must also be cautious with foreign property — UK IHT applies to worldwide assets for UK-domiciled individuals, but the instalment option may not be available for overseas land unless the estate can demonstrate that the asset cannot be sold without undue hardship. HMRC has strict guidance on this point, and professional advice is strongly recommended for cross-border estates.

Making the Election and Calculating Payments

To use the instalment option, the executors must make a formal election to HMRC on the IHT account (form IHT400) or by separate written notice within the six-month payment window. The election must specify which assets are being deferred and the amount of tax attributable to each. HMRC will then issue a schedule of ten annual instalments. The first instalment is due six months after the normal due date (i.e., 12 months after death), and each subsequent instalment is due on the anniversary of that date.

The calculation of the instalment amount is straightforward: divide the tax attributable to the qualifying asset by ten. However, interest accrues on the outstanding balance from the normal due date. For example, if the tax on a property is £100,000, each instalment is £10,000, but HMRC will charge interest on the unpaid balance of £90,000 after the first instalment, then £80,000 after the second, and so on. This means the total cost over ten years can be significantly higher than the headline tax figure. Executors should also consider that Business Property Relief (BPR) or Agricultural Property Relief (APR) may reduce the taxable value of qualifying assets, thereby lowering the instalment amount. For estates with complex asset mixes, using a third-party tool to track cross-border payments or valuations can streamline the process. For example, some international families use channels like Airwallex global account to manage multi-currency settlements when dealing with foreign property or beneficiaries abroad.

Interest, Penalties, and Early Repayment

Interest is a critical factor in deciding whether to use the instalment option. As noted, the current HMRC late payment interest rate is 7.75% per annum (as of the 2024/25 tax year). This rate is set by reference to the Bank of England base rate plus 2.5%, and it can change quarterly. If interest rates rise, the cost of deferring tax increases. Conversely, if rates fall, the instalment option becomes more attractive relative to borrowing from a bank.

Executors have the right to repay the entire outstanding balance early at any time, with no penalty. This is useful if the estate sells the qualifying asset sooner than expected or if the executors secure a lower-cost loan. However, if an instalment is missed, HMRC can demand the full outstanding balance immediately, plus interest and potential penalties. Late payment penalties start at 5% of the unpaid tax after 30 days, with additional 5% penalties at six and twelve months (HMRC, Penalties for Late Payment, 2024). To avoid this, executors should set up a direct debit or ensure funds are available well before each instalment date. For estates where the qualifying asset generates income (e.g., rental property or business profits), that income can be used to fund the instalments, creating a natural hedge.

Special Cases: Woodlands, Heritage Assets, and Trusts

Certain niche asset classes have their own instalment rules. Woodlands managed on a commercial basis qualify for special relief under Schedule 3 to the Inheritance Tax Act 1984, allowing IHT to be deferred until the timber is sold. This is not technically an instalment option but a full deferral, which can be more advantageous. Heritage assets (such as historic buildings or works of art) may qualify for conditional exemption, where IHT is deferred if the asset is kept in the UK and made accessible to the public. If the asset is later sold, the tax becomes due, and the instalment option may then apply.

For trusts, the rules differ depending on the type of trust. Interest in possession trusts and discretionary trusts each have their own IHT charges, and the instalment option may be available for land or business assets held within the trust. However, the trustee must make the election, and the trust’s tax return must reflect the deferred amounts. A common scenario involves a nil rate band discretionary trust created under a will, where the trust holds a share of the family home. In that case, the instalment option can be used for the tax on that share, allowing the surviving spouse to remain in the house without selling. Executors and trustees should document the election carefully, as HMRC may challenge the valuation of the asset years later when the final instalment is paid.

Practical Strategy: When to Use Instalments

The decision to use the instalment option should be based on a cost-benefit analysis. The primary benefit is cash-flow preservation — the estate does not need to sell illiquid assets quickly. This is especially valuable in a falling property market or when the business is a family-run operation that would be destroyed by a forced sale. The primary cost is the interest charged on the deferred balance, which at current rates can be substantial.

A practical rule of thumb: if the qualifying asset generates income (e.g., rental yield of 4-5% per annum), the instalment option may be net positive, as the income can cover the interest and part of the principal. If the asset generates no income (e.g., an empty second home), the interest cost may outweigh the benefit, and a bank loan or sale might be cheaper. Executors should also consider the estate’s overall liquidity — if there is sufficient cash or listed shares to pay the IHT bill in full, it is usually simpler to do so, avoiding the administrative burden of ten years of payments and interest calculations. For estates with cross-border elements, currency fluctuations can add another layer of complexity, making it essential to model different scenarios.

FAQ

Q1: Can I pay IHT in instalments on my main residence if I want to keep living in it?

Yes, if the main residence forms part of the estate and the IHT is attributable to it, the instalment option is available under Section 227 of the Inheritance Tax Act 1984. This is common when a surviving spouse or child inherits the home but does not have liquid funds to pay the tax. However, if the property is held as joint tenants with a surviving spouse, it passes outside the estate and does not qualify. Also, interest at 7.75% (2024/25 rate) will accrue on the outstanding balance, so the total cost over ten years can be significant.

Q2: What happens if I sell the property before all ten instalments are paid?

If you sell the qualifying asset (land, business, or shares) before all instalments are paid, the entire outstanding IHT balance becomes due immediately. HMRC will also charge interest up to the date of sale. This rule prevents executors from deferring tax indefinitely while the asset is liquidated. If you plan to sell, it is often better to pay the tax from the sale proceeds and close the estate promptly. Partial sales of land may allow the instalment plan to continue on the unsold portion, but HMRC must agree in writing.

Q3: Does the instalment option apply to foreign property owned by a UK-domiciled person?

Generally, yes, but with restrictions. UK-domiciled individuals are liable for IHT on their worldwide assets, and foreign land or business assets can qualify for the instalment option under Section 228. However, HMRC requires evidence that the asset cannot be sold without undue hardship or that local laws prevent transfer of funds. Interest is still charged at the UK rate. For non-UK domiciled individuals with UK assets, the instalment option applies only to UK-situated land and business assets, not foreign ones.

References

• HMRC. 2024. Inheritance Tax Manual, IHTM14563–IHTM14570.
• HMRC. 2024. Interest Rates for Late Payments and Repayments.
• HM Treasury. 2024. Inheritance Tax Act 1984, Sections 227–229.
• HMRC. 2024. Penalties for Late Payment of Inheritance Tax.
• Office for Budget Responsibility. 2024. Inheritance Tax Receipts and Forecasts, March 2024.