Paying IHT on an Inherited House in Ten Yearly Instalments

Yes — you can pay the inheritance tax on an inherited house in instalments, spread over ten equal yearly payments rather than all at once. It is a genuine relief for a family that has inherited a property but no ready cash, and it is one of the reasons a house does not have to be sold in a hurry the moment someone dies. But it is not free breathing space. Interest runs on what you still owe, and one particular rule can pull the whole remaining balance due at a stroke.

The option exists because inheritance tax can land on assets you cannot easily turn into money. A house is worth a great deal on paper and nothing in your pocket until it sells. Rather than force every grieving family to sell up to pay the tax, the law lets the tax on land and certain other assets be paid across a decade. What it does not do is reduce the amount — it changes the timing, and the timing has a price.

So the honest way to think about instalments is as a cash-flow tool with a cost attached, not a discount. Before you choose it, it is worth understanding exactly which parts of the estate qualify, how much the interest adds up to, and what happens on the day the house is sold.

The short answer: ten yearly payments on qualifying assets

Where inheritance tax is due on qualifying property, you can elect to pay it by ten equal annual instalments instead of in a single lump. You make the election when you submit the inheritance tax account, choosing it for the assets that qualify. The tax on everything else still has to be paid up front before the grant is issued.

For a typical family inheriting a parent's house, the attraction is obvious. The house may account for most of the tax, and until it sells there is no money to pay that tax with. Instalments let the estate obtain the grant, take its time over the property, and pay the tax on the house gradually — rather than being forced into a fire sale to meet a deadline.

The rules for the instalment option are set out in the Inheritance Tax Act, and HMRC's guidance explains how to elect for it.

Source: Inheritance Tax Act 1984, section 227, legislation.gov.uk, under the Open Government Licence v3.0.

Which parts of the estate actually qualify

The instalment option is not available on everything, and this is the first thing to check. It applies, broadly, to:

• Land and buildings — the family home, a second property, land. This is the category most inherited-house questions fall into.
• A business, or an interest in a business, and certain business assets.
• Some unquoted shares and securities — shares in a company that is not listed, subject to conditions such as the holding giving control, or the tax on them being a large enough share of the bill.

It does not apply to cash in the bank, to quoted shares in the ordinary case, or to most personal possessions. The tax on those has to be found up front. So an estate is often split: the tax on the liquid assets is paid immediately — sometimes itself a scramble when the cash is locked inside frozen accounts — while the tax on the house is put onto instalments.

Inheritance tax is charged at the standard rate of 40% on the value of an estate above the available allowances, so on a valuable house the tax attributable to the property can be substantial, and the ability to spread it is worth real money in cash-flow terms even before you weigh the interest.

Source: HM Revenue & Customs / GOV.UK, How Inheritance Tax works: thresholds, rules and allowances.

How the instalments actually run

The first instalment is due at the end of the sixth month after the month in which the person died — exactly the date on which the whole bill would otherwise have been payable. So instalments do not buy you extra time on the first tenth; they buy you time on the remaining nine tenths.

After that, an instalment falls due on each anniversary, until the tax on that asset is paid off over the ten years. You can pay off the outstanding balance early at any point if the estate comes into funds — for instance when the house sells — and many estates end up doing exactly that.

Because the house sits in the estate while the instalments run, remember it still costs money to hold in the meantime. There is insurance to keep in force and, once any exemption ends, running costs on an empty property. If the estate's cash is thin, the order in which everything gets paid is not always a free choice — see how an estate that owes more than it owns pays out in the correct order.

The interest that runs on the balance

This is the part that turns instalments from a gift into a trade-off. On an ordinary inherited home, interest is charged on the inheritance tax you have not yet paid. Each yearly instalment carries interest on the balance outstanding, so the longer you take, the more the tax costs in total.

The rate is HMRC's late-payment interest rate, which moves with the Bank of England base rate, so it is not a fixed figure and it can rise or fall over the ten years. Check the current rate on GOV.UK before choosing this route, because in a higher-rate environment the interest can add up to a meaningful sum on a large balance.

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

There is one important exception worth knowing. For some assets — a genuine trading business, agricultural property, and certain shareholdings — the instalments can be interest-free provided each is paid on time. That relief does not extend to a straightforward inherited dwelling or an investment property, which is where most families are. If part of the estate is a business, the interest position on that part may be far kinder than on the house, and it is worth taking advice, especially where life cover has been written in trust to pay the business inheritance tax.

The sale rule that catches people out

Here is the trap that surprises executors more than any other. The instalment option lasts only as long as you keep the property. The moment the house is sold, the entire outstanding balance of tax on it, together with any interest accrued to that date, becomes payable immediately.

You cannot sell the house, pocket the proceeds, and carry on paying tax in leisurely yearly slices on an asset you no longer own. Completion triggers the whole remaining bill. The practical danger is obvious: an executor who has been paying instalments, sells the house, distributes the sale money to the beneficiaries, and only then remembers that HMRC is owed the rest — now with the cash gone.

The discipline that avoids this is simple. When the property sells, set the outstanding tax aside from the completion monies before distributing anything, and pay HMRC straight away. Treat the tax as the first call on the sale proceeds, not an afterthought. Chasing beneficiaries to give money back is far harder than never letting it leave.

So is spreading it the right choice?

Instalments make sense where the estate is genuinely short of cash and the alternative is selling the house before anyone is ready, or before the market suits. They make less sense where the estate has, or can quickly raise, the money to clear the tax, because paying it off avoids the interest altogether.

The decision also interacts with the allowances and any reliefs. Where relief only partly covers the value — for example where a relief applies at a reduced rate — there can still be a real bill to fund, as we set out in why relief above the allowance can still leave a real inheritance tax bill. And where the estate's cash is tied up in accounts that are frozen or in a house that has to be sold, the liquidity question can force the choice regardless of what would be ideal — the same squeeze that makes people ask whether a joint account really passes straight to the survivor.

The cleanest way out of the whole dilemma is to have money that arrives quickly and does not itself get taxed. A life insurance policy written in trust pays out to the trustees on the death certificate, outside the estate, and the proceeds can be used to clear the inheritance tax in one payment — no instalments, no interest, no sale forced by a deadline. That is exactly the problem addressed in why a life payout can be taxed at 40% and how a trust stops it. If you would rather your own family paid the bill outright than serviced it for a decade, you can get life insurance quotes and ask an FCA-authorised broker about writing the cover in trust.

Scotland and Northern Ireland

Inheritance tax and the instalment option are UK-wide, so the ten-yearly-payments rule, the interest on the balance, and the whole-balance-on-sale rule apply the same way in Scotland and Northern Ireland as in England and Wales. The election is made to HMRC in the same manner wherever the property is.

What differs is the surrounding process. In Scotland the estate is administered under confirmation rather than a grant of probate, and the family home is heritable property dealt with under Scots law; the executor confirmed to the estate makes the election and manages the instalments. In Northern Ireland the grant process follows its own rules. Neither changes the tax arithmetic — but the person entitled to act, and the paperwork proving it, is jurisdiction-specific, so make sure whoever is dealing with the estate has the correct authority before electing.

Frequently asked questions

Which assets can inheritance tax be paid on in instalments?

Land and buildings, certain unquoted shares, and some business assets qualify for payment by ten equal yearly instalments. Cash, quoted investments and most personal possessions do not — the tax on those has to be paid up front before the grant is issued. The first instalment falls due at the end of the sixth month after the month in which the person died, and the rest on each following anniversary.

Does interest run on the unpaid balance?

Yes, on an ordinary inherited home. Interest accrues on the outstanding inheritance tax at HMRC's published late-payment rate, which moves with the Bank of England base rate, so it is not fixed. The instalment option spreads the cost rather than reducing it. Some business and agricultural assets can be paid interest-free if each instalment is on time, but that does not extend to a straightforward dwelling, so check the current rate on GOV.UK before choosing this route.

What happens to the instalments if the house is sold?

The remaining balance, plus interest to date, becomes payable immediately on sale. Executors sometimes forget this and distribute the proceeds first, then find HMRC is owed the rest with the money already gone. Set the outstanding tax aside from the completion monies and pay HMRC straight away, treating it as the first call on the sale proceeds rather than chasing beneficiaries for it later.