IHT423: Paying Inheritance Tax From a Frozen Bank Account

You pay the inheritance tax before probate, and while the money is frozen, using a scheme built for exactly this problem. It is called the Direct Payment Scheme, and it lets a bank or building society send money straight from the dead person's frozen account to HMRC to settle the tax — before the grant exists and before you can otherwise touch a penny.

The reason it has to work this way is a genuine chicken-and-egg. You cannot get the grant of probate until the inheritance tax is paid or arranged. But you cannot get at the money to pay the tax until you have the grant. Families discover this at the worst moment: a large tax bill, a house they cannot sell yet, and bank accounts holding plenty of money that the bank will not release. The Direct Payment Scheme is how you break the loop legitimately.

The form that authorises it is IHT423. It tells a named institution to pay a stated amount from the deceased's account directly to HMRC. It does not put money in your hands — nothing goes to a family member — it moves cash from one frozen account to the tax authority, which is the one payment the bank is content to make at this stage.

The short answer: the Direct Payment Scheme

The scheme exists because HMRC recognised the trap. The tax has to be settled to unlock the grant, so HMRC agreed a route with the banking industry: the deceased's own money can be used to pay the deceased's own tax, in advance of the grant, if the institution holding it agrees to pay HMRC directly rather than releasing it to anyone.

In outline it runs like this. You work out the inheritance tax due on the estate account. You get a reference number from HMRC. You complete an IHT423 for each bank or building society whose funds you want to use, and send each institution its form. Each one pays its share straight to HMRC, quoting the reference, and HMRC credits it against the bill. Once the tax is paid, the probate application can proceed.

It is worth being clear about what the scheme is not. It does not give you spending money for the funeral, the bills or the mortgage — that is a different set of problems, covered in what happens to payments going into and out of a frozen account after a death. The Direct Payment Scheme does one narrow job: it gets the tax paid so the estate can move.

Why the tax falls due before any money is released

Inheritance tax is due by the end of the sixth month after the month in which the person died. Miss that date and HMRC charges interest on the unpaid amount until it is settled.

Source: HM Revenue & Customs / GOV.UK, Pay your Inheritance Tax bill.

That deadline takes no account of whether you can reach the money. It runs from the death, not from the grant, and the grant routinely takes longer to obtain than six months once the account and any valuations are prepared. So the tax can be overdue, and accruing interest, at the very point when every asset in the estate is still locked. The Direct Payment Scheme is HMRC's own answer to a deadline it set.

This is also why liquidity in an estate matters so much, and why so much of it is illiquid at exactly the wrong time. Money in the deceased's sole name is frozen. A house cannot be sold before the grant. Even a joint account, which many assume solves everything, does not necessarily help — read whether a joint account really passes straight to the survivor before you rely on it to fund a tax bill.

Step one: get the inheritance tax reference number

Nothing in the scheme works without a reference number, and this is where families lose time they did not know they had lost. The reference is not the same as any number on the death certificate or the will — it is a specific inheritance tax payment reference you apply to HMRC for.

Apply for it well before you expect to pay, because it does not arrive by return. HMRC asks you to allow at least three weeks for it, and only once you have it can any IHT423 be actioned, because every payment the banks make has to quote it.

Source: HM Revenue & Customs / GOV.UK, Get an Inheritance Tax reference number.

The practical lesson is to apply for the reference as one of the first things you do, in parallel with valuing the estate, rather than at the end when the bill is calculated. Treat it as the long-lead item it is.

Step two: one IHT423 for each account

You do not send a single form covering the whole bill. You send a separate IHT423 to each bank, building society or NS&I whose money you want to use, and on each form you state how much that institution should pay towards the total. The amounts across all the forms should add up to the tax you are settling this way.

Send the forms to the institutions at the same time as you send the inheritance tax account to HMRC, so the pieces line up. Then chase. The single most important thing to understand about IHT423 is that posting it does not make the payment happen on its own. Each institution processes it in its own time, and some are slow. If a deadline is close, telephone the bereavement team, confirm they have the form, and ask when the payment will leave.

Keep a copy of every form and a note of the amount each institution agreed to pay. If HMRC later queries whether the tax was paid, or an institution pays the wrong figure, your record of what was requested is what sorts it out.

What the banks actually do — and the ones that decline

Most large UK banks, the major building societies and NS&I take part in the scheme, and for them it is routine. Their bereavement teams handle IHT423 forms regularly and will pay the stated sum to HMRC without releasing anything to the family.

But participation is voluntary, and this is the part that catches people out. Not every institution takes part, and some that do will not pay from every kind of account — certain investment accounts, bonds or fixed products may be excluded even where an ordinary current or savings account would be fine. You only find out by asking each one. If an institution declines, the money in that account stays frozen until the grant, and you have to find the tax from somewhere else.

One thing the scheme will never do is pay money to a beneficiary or executor. It is a transfer from the frozen account to HMRC and nowhere else. If you are worried about a bank instead using the balance to clear something the deceased owed it, that is a separate question we cover in whether a bank can take money from the account to clear the deceased's loan.

If the scheme does not cover the whole bill

Where the participating accounts do not hold enough, or key institutions decline, the tax still has to be paid to release the grant. The realistic options are these.

• Elect to pay by instalments on qualifying assets. Tax attributable to land, buildings and certain business assets can be spread over ten years, which reduces the amount you need to find up front. The trade-offs are set out in paying inheritance tax on an inherited house in instalments.
• Funds provided by the beneficiaries. Those inheriting sometimes lend the estate the money to pay the tax, on the understanding they are repaid once assets are released. This needs to be documented properly.
• Borrowing or an executor's loan. Some lenders offer short-term finance secured against the estate specifically to pay inheritance tax, repaid when the grant unlocks the assets. It carries interest and fees, so it is a last resort rather than a first move.
• Bridging against the property. Where the estate's value is tied up in a house, bridging finance can cover the bill until the sale completes. Again, it has a cost, and it only makes sense against a sale that is genuinely progressing.

If the sums simply do not work — the debts and the tax together exceed what the estate owns — you are in different territory, and the priority order for paying what the estate does have is not a matter of choice. See how an insolvent estate is paid out in the correct legal order before paying anyone.

All of this is easier when the estate holds cash that arrives quickly and sits outside the frozen accounts. That is precisely what a life insurance policy written in trust provides: it pays the trustees on the death certificate, without waiting for the grant, and the proceeds can be used to settle the tax and keep the estate moving. If you want to spare your own family this exact scramble, you can get life insurance quotes and ask an FCA-authorised broker about writing the policy in trust so the money lands where it is needed.

Scotland and Northern Ireland

Inheritance tax is a UK tax, and the Direct Payment Scheme works across the whole UK. Form IHT423, the reference number, the six-month due date and the interest that runs after it are the same in Scotland and Northern Ireland as in England and Wales, and the same banks and building societies participate.

What changes is the court document the tax unlocks. In Scotland the authority to administer the estate is confirmation, applied for through the sheriff court, rather than a grant of probate — but the tax still has to be dealt with before confirmation is granted, and the scheme is used in exactly the same way to do it. In Northern Ireland the grant process differs again, while the tax mechanics are identical. Wherever you are, get the reference number early, because it is the same bottleneck everywhere.

Frequently asked questions

How do you pay inheritance tax when the money is frozen?

Through the Direct Payment Scheme. Form IHT423 authorises a bank or building society to pay inheritance tax straight from the deceased's frozen account to HMRC before the grant is issued. You need an inheritance tax reference number first, and obtaining that takes time, so apply for it early — well before the tax falls due — because no payment can be made until the number exists.

Do I need a separate IHT423 for each account?

Yes. One form goes to each institution holding money you want to draw on, and each decides for itself whether to take part. Send them at the same time as the account goes to HMRC, state the amount each institution should pay, and then chase, because the payment does not happen automatically once the form is posted. Keep a copy of every form and the amount requested.

What if the bank refuses to take part?

Not every institution participates, and some will not pay from certain account types. If yours declines, the money in that account stays frozen until the grant, and the alternatives include electing for instalments on qualifying assets, borrowing, funds provided by the beneficiaries, or bridging finance against the property. Interest continues to run on unpaid inheritance tax, so line up a fallback quickly rather than waiting to see whether the bank agrees.