The ‘eye-watering’ charge that will add thousands to inheritance tax bills

Grieving families hit with ‘draconian’ backdoor Budget raid

Bereaved families face being slapped with thousands of pounds on their inheritance tax bills thanks to a backdoor raid in the Budget.
The Government on Wednesday announced it will increase the interest rate HM Revenue and Customs (HMRC) can charge on unpaid tax by 1.5 percentage points to 9pc as part of a clampdown on tax avoidance.
But experts warned the measure will add £750 a month to the inheritance tax bills of grieving families hit by civil service delays beyond their control.
Families have six months to pay inheritance tax after the death of a loved one before interest is added to the bill.
Many but not all families require a legal document called a grant of probate in order to access the deceased’s funds and sell the house, usually the biggest asset in the estate.
It currently takes nine weeks on average to obtain a grant of probate. But in complex cases, the process can drag on for over a year.
Kieran Bowe, of law firm Russell-Cooke, said: “The Government’s proposal to increase the interest charge adds further financial pressure to already hard pressed bereaved families.
“The cost of interest on projected rates of interest from April 2025 of just £100,000 of inheritance tax amounts to £9,000 per annum.
“An inheritance tax liability of £1m could amount to £90,000 per annum – or nearly £1,750 of interest per week on unpaid tax.”
HMRC charges late payers 2.5 pc interest on top of the current Bank of England base rate, which currently stands at 5pc.
But the HMRC surcharge will rise to 4pc in April 2025. The raid will rake in an extra £215m a year for HMRC by 2029-30, according to official figures.
If the Bank Rate remains unchanged, then late payers of tax face 9pc interest charges next year.
Experts said the increase was “eye-watering”.
Andrew Park, of accountancy firm Price Bailey, said: “This is a worrying shift from charging enough to deny taxpayers an advantage in paying late to creating another punishment by the backdoor.”
Shaun Moore, of wealth manager Quilter, said: “9pc is a high rate of interest to be applied and completely at odds with the saving rates available in the market.”
Dawn Register, of accountancy firm BDO, said: “The increased rate is a surprisingly draconian measure considering the already high level of late payment interest that taxpayers are charged, currently 7.5pc. The new rate – if the base rate remains unchanged – will be an eye-watering 9pc per annum.
“This will widen the gap between the high rate of interest payable by taxpayers and the amount payable by HMRC when tax is repayable to taxpayers.”
Rachel Reeves increased the rate on interest in order to encourage taxpayers to meet their liabilities on time. This is part of the Government’s mission to close the tax gap.
Tim Stovold, of accountancy firm Moore Kingston Smith, said: “It is hard to disagree with having a deterrent when the failure to pay the tax is a wilful act by taxpayers – but there are circumstances where the inability to pay tax is outside the control of the person owing it. “
Probate waiting times have improved slightly since last year, falling to eight weeks from 14 weeks, according to the latest statistics.
However, families are still having to wait for months without a grant as HM Courts & Tribunals Service struggles with a backlog of cases caused by the pandemic and the loss of experienced staff.
HMRC said taxpayers struggling to make payments should contact them as soon as possible to discuss options for repayment.
A government spokesman said: “Applying different rates of interest to late payments and refunds is essential, both to ensure people are not encouraged to overpay their tax to secure a higher interest rate than available commercially and to ensure those paying late don’t get an unfair financial advantage over those paying on time.”