IHT Interest Calculator

How to use this calculator

1. Work out the due date correctlyIt is the last day of the sixth month after the month of death. A death in July means a due date of 31 January.
2. Check the current HMRC rateIt tracks the Bank of England base rate and changes with it. Using a stale rate is the most likely source of error here.
3. Split the period if the rate changedThis applies one rate across the whole period. Where the rate moved, calculate each segment separately and add them.
4. Enter any payment on accountInterest runs only on what remains outstanding, so a partial payment before the due date reduces it proportionally.

Due before you can pay it

The structural problem with inheritance tax is a timing mismatch that the rules do nothing to relieve.

The tax is due at the end of the sixth month after death. The grant of probate, which is what lets the executor access the estate's money, routinely takes longer than that — and has at times taken very much longer.

Interest runs from the due date regardless. HMRC has no discretion to waive it because probate was delayed, because the estate was illiquid, or because the delay was entirely the fault of the system.

That is not a penalty. Penalties are a separate matter and attach to late accounts rather than late payment. Interest is simply the price of the money being outstanding, and it is not negotiable.

The practical consequence is that executors need a plan for paying the tax before they can access the estate. Several routes exist.

The direct payment scheme is the most useful. It allows banks and building societies to release funds directly from the deceased's accounts to HMRC before the grant is issued. Most major institutions participate, and it costs nothing.

National Savings and Investments holdings and some government stock can also be used the same way.

Beyond that, executors can pay from their own funds and be reimbursed from the estate, or a beneficiary can lend the money. Executor's loans exist commercially but carry their own interest, which needs comparing against the HMRC rate rather than assumed to be cheaper.

The instalment option helps with specific asset types. Tax attributable to land and buildings, certain shares, and business assets can be paid in ten equal annual instalments. Interest generally still runs on the outstanding balance, so it defers the cash flow rather than avoiding the cost — though for some business and agricultural property the interest treatment is more favourable.

One more point worth knowing: interest also runs in the other direction. If an estate overpays, HMRC pays repayment interest, though at a considerably lower rate than it charges.

Worked example: £80,000 due, paid seven months late

A death in July gives a due date of 31 January.

If the tax is paid on 4 August, that is 185 days late.

At an annual rate of 8.25%, the daily rate is 0.0226%. On £80,000 outstanding that is £18.08 a day.

Over 185 days, the interest is £3,345.21, bringing the total to £83,345.21.

That is 4.18% of the tax added purely because the estate could not be accessed in time — a substantial sum, and one the beneficiaries ultimately bear.

The daily figure is the one to focus on. Every additional month of delay costs £542, every additional quarter £1,627, and a full further year would cost £6,600.

That makes the case for the direct payment scheme very clearly. Getting even half the tax paid on time halves the interest. Paying £40,000 on account by the due date would cut the interest here to £1,672.60 — a saving of £1,672.61 for a piece of paperwork.

Now consider the instalment option on a property-heavy estate. £80,000 over ten years is £8,000 a year. That solves the cash flow problem entirely, but interest continues on the declining balance, so the total paid is higher than settling at once — and the estate cannot usually be fully wound up while instalments are outstanding.

If the property is then sold, the remaining instalments become payable immediately, which catches out executors who chose instalments and then found a buyer.

One comparison worth making: at 8.25%, HMRC interest is more expensive than most secured borrowing and cheaper than most unsecured borrowing. A beneficiary with savings earning 4% who lends the estate the money to settle the tax is better off doing so, provided the loan is properly documented.

The cost of delay on different amounts

At 8.25%. These are simple interest, not compound, which is how HMRC calculates it. The one and three month columns use 30 and 90 days; the six month column is half a year.

The column that matters most is the per-day figure, because it turns an abstract deadline into a number the executor can weigh against the effort of arranging early payment. On a £250,000 liability, a week of avoidable delay costs £395.

Reducing the interest and avoiding penalties

The single most effective action is to pay something by the due date, even if the final figure is uncertain. HMRC accepts payments on account, and interest runs only on what remains outstanding. Overpaying attracts repayment interest rather than a problem.

Estimating high and adjusting later is usually better than waiting for perfect figures. An estate valuation that takes another two months to finalise costs real money at these rates.

The direct payment scheme should be arranged as early as possible. Banks need the IHT reference number, which comes from HMRC after the account is submitted, so the sequence has to start well before the deadline.

Apply for the inheritance tax reference number early — it takes time to issue and nothing can be paid without it.

Where the estate holds a property that will be sold, consider whether the sale can be brought forward or whether instalments are the better route. Selling under time pressure to meet a tax deadline rarely achieves the best price, and a lower sale price costs more than the interest usually would.

Penalties are separate from interest and worth understanding. They attach to filing the inheritance tax account late rather than paying late. The account is generally due within twelve months of the end of the month of death, so there is a six month gap between the payment deadline and the filing deadline — and missing the filing deadline adds penalties on top of the interest already accruing.

Where the delay is genuinely outside your control, it is still worth writing to HMRC explaining the position. Interest will not be waived, but a clear record helps if penalties are later considered, and HMRC does exercise discretion on penalties where there is a reasonable excuse.

Finally, the rate itself. It is set as base rate plus a margin and changes whenever base rate does. Over a long administration the rate may change more than once, and each period should be calculated at the rate then in force. This calculator applies a single rate, which is an approximation over any period spanning a change — run it separately for each segment for an accurate figure.

Assumptions and limitations

• Applies a single interest rate across the whole period
• The rate tracks the Bank of England base rate and changes with it
• Uses simple daily interest, which is how HMRC calculates it
• Does not model the more favourable interest treatment on some business and agricultural property
• Does not calculate the inheritance tax itself, only the interest on it
• Does not model penalties, which attach to late accounts rather than late payment
• Not tax advice — HMRC's own calculation is authoritative

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