Potentially a Lot of Interest… in Instalments!

Paying Inheritance Tax in Instalments from 2026: What You Need to Know

The Autumn Budget 2024 brought a major shake-up to inheritance tax (IHT) planning — particularly for business owners, farmers, and those with high-value estates.

With Business Property Relief (BPR) and Agricultural Property Relief (APR) set to change from 6 April 2026, assets that have been fully protected from IHT for decades may suddenly face a tax bill — and for many, the only practical option will be to pay in instalments.

However, there’s a catch: with interest rates rising, the cost of paying over time could be significant, with interest alone accounting for more than one-third of the total IHT bill in some cases.

In this article, we explain:

• What’s changing with APR and BPR
• When you can pay IHT in instalments
• When interest applies (and how much it adds)
• Why planning ahead — before April 2026 — is critical

 What’s Changing in April 2026?

Currently, BPR and APR offer up to 100% relief on qualifying business and agricultural assets — which often results in no IHT being due on farms or trading company shares passed down through generations.

But under proposals introduced by Chancellor Rachel Reeves, from 6 April 2026, 100% relief will be capped at £1 million per person.

Any value above that will only qualify for 50% relief, and the remainder could be subject to 40% IHT.

 Example:

A business valued at £3 million may now face:

• 100% BPR on the first £1m = £0 IHT
• 50% BPR on the next £2m = £1m chargeable
• IHT at 40% = £400,000 liability

With businesses often illiquid and heavily tied up in assets, many families may need to consider HMRC’s 10-year instalment plan to manage this cost.

 Paying IHT by Instalments: The Basics

If certain conditions are met, IHT can be paid in ten equal annual instalments, starting six months after the end of the month in which the death occurred.

 Qualifying assets for the instalment option:

• A business or interest in a business
• Land and buildings (including farmland)
• Shares where the deceased had control
• Certain unquoted shares if:
  • Tax due on the shares is ≥ 20% of total IHT
  • Value exceeds £20,000 and represents at least 10% of the company’s share capital
  • Immediate payment would cause undue hardship

This instalment option applies where the IHT arises due to:

• A chargeable lifetime transfer (CLT) (e.g., gifts into trust)
• Tax on death (including CLTs and PETs)
• A 10-year anniversary charge on a trust

Note: HMRC still expects some of the IHT to be paid upfront — usually the portion not related to qualifying assets.

 Interest Charges: The Hidden Cost

Here’s the part many people miss — not all instalment payments are interest-free.

 Interest is charged when:

• IHT relates to land or buildings, unless covered by APR
• Assets include investment companies or property dealing companies
• BPR only covers 50%, not 100%

From 6 April 2025, HMRC’s interest rate for late payments will be set at 4% above the Bank of England base rate — currently 8% total.

That means even if you choose to pay in instalments, you may end up paying significantly more over time.

 Worked Example: Fred’s Estate

Let’s see how this works in practice.

 Scenario:

• Fred dies on 12 December 2024
• Estate = £700,000
  • 50% = house
  • 50% = cash & investments
• Nil-rate band = £325,000
• Estate left to niece (not exempt)
• IHT due: (£700k – £325k) × 40% = £150,000

Fred’s house qualifies for the instalment option (50% of estate value), so £75,000 can be paid over 10 years. The other £75,000 must be paid immediately.

 Payment Schedule:

• 30 June 2025:
  • Immediate tax: £75,000
  • 1st instalment: £7,500
  • Total: £82,500
• 30 June 2026:
  • 2nd instalment: £7,500
  • Interest on £67,500 at 8% = £5,400
  • Total: £12,900

At this rate, interest alone over 10 years could add £35,000–£40,000 to the total bill — more than 25% extra.

 Practical Tip: Plan Ahead Before April 2026

With these changes coming into force from 6 April 2026, business owners and families should act sooner rather than later to:

 Review asset structures:

Can the business or farmland be restructured or gifted early to reduce value below the £1m cap?

 Consider lifetime gifts:

Passing shares or land before 2026 could be a potentially exempt transfer (PET) — IHT-free if the donor survives 7 years.

 Use life insurance:

Some estates may benefit from life insurance in trust to cover expected IHT liabilities.

 Prepare for instalments:

Executors should understand what qualifies, what doesn’t, and plan for any interest charges.

 Key Takeaways

 Final Thoughts: Instalments Can Help — But Interest May Hurt

The ability to spread IHT payments over ten years is a valuable tool, especially for estates tied up in property or business assets.

But with interest charges potentially adding thousands to the bill, relying solely on instalments is not a tax planning strategy — it’s a cash flow tool.

Now is the time to:

• Review estate values
• Reassess relief eligibility
• Take early action while BPR and APR are still generous

 Talk to Merranti Before the 2026 Deadline

At Merranti Accounting, we help:

• Business owners and landowners plan around BPR/APR caps
• Families restructure estates for future IHT efficiency
• Executors understand their instalment and interest obligations
• Clients reduce exposure through gifts, trusts, and smart tax strategies

 The clock is ticking — and these changes could cost your estate hundreds of thousands if left unmanaged.

 Book Your IHT Planning Review Today

HMRC: Paying Inheritance Tax in Instalments