Families face selling off treasured ancestral homes as a valuable inheritance tax “get around” is made all but redundant.
Rising interest rates have made a previously helpful system unaffordable for families and could force them to sell up property to settle death duty bills.
The issue stems from the tax office allowing families to pay IHT bills in instalments, albeit charged with interest.
This is so families could avoid selling properties to meet HMRC’s rule of settling the divisive 40pc death duty within six months of death – regardless of whether the inheriting family has obtained legal access to money held within an estate.
Bills were split into 10 payments with interest paid at the Bank of England rate plus 2.5 percentage points. However, the Bank Rate has risen from 0.1pc to 1.25pc since December.
The sharp rise has added thousands of pounds to instalments, meaning families could be forced back into selling properties.
A family inheriting a £1m property from an unmarried relative, for example, would be faced with a £200,000 death tax bill. With the Bank Rate at 0.1, they would have paid just £23,400 in interest over 10 years.
However, with rates at 1.25pc, it would now cost £33,750 over the same period. The rates are variable, meaning families who signed up last year have faced huge increases in their repayments this year.
If the Bank Rate rose to 3pc, as predicted by investment bank JP Morgan, a family would be faced with close to £50,000 in interest on their 10-year IHT payment plan – more than double the amount compared to last year, according to calculations from advisers NFU Mutual.
Sean McCann of the firm said: “As the cost of HMRC interest payments rises, many families will find them unaffordable and will be forced to sell.”
Families can opt out of the payment plans at any point, as long as they cover any unpaid taxes.
More and more face paying death duties, as protections against the tax remain frozen, despite vast increases in house prices.
The main £325,000 IHT allowance has not risen since 2009 and will remain frozen until 2026. The £175,000 “main residence nil rate band”, a protection for those passing on their main homes to direct descendants, will also stay at its current level.
The number of people who pay the toll each year is forecast to hit more than 45,000 by 2026, almost double the 23,000 who paid in 2019-20. The annual death tax haul already stands at £5.4bn and is expected to reach £8.3bn over the next four years.