IHT Instalment Option: Paying Inheritance Tax in Annual Instalments
Executors of estates including land, qualifying businesses, or certain unquoted shares can spread the IHT bill over 10 equal annual instalments under IHTA 1984 ss227–229. The option prevents a forced sale of a farm or family business to fund an immediate IHT demand — but interest runs on unpaid amounts, and a sale of the asset accelerates all outstanding tax.
Assets Qualifying for the Instalment Option
Land and buildings
Any land or buildings — including residential property, farmland, commercial property, and woodland — qualifies for the instalment option. No minimum value. The land must form part of the taxable estate (not, for example, jointly owned property that passes by survivorship to a surviving tenant).
A business or interest in a business
This covers sole trader businesses, partnerships, and shares in an unincorporated business. Note: Business Property Relief (BPR) may eliminate or reduce the IHT on such assets — but where BPR does not apply in full (e.g. assets above the April 2026 £2.5m cap) the instalment option covers the remaining IHT.
Controlling shareholding in a company
Shares giving control of a company (more than 50% of voting rights) qualify, whether the shares are quoted or unquoted. Control is tested at the date of death.
Unquoted shares: minimum conditions
Unquoted shares that do not confer control qualify only if: (a) the IHT attributable to them is £20,000 or more, AND (b) the shares represent at least 10% of the nominal value of all shares in the company at the date of death, OR the executor can show that IHT cannot be paid in a single payment without undue hardship.
How the Instalment Option Works
The IHT instalment option must be elected on Form IHT400 before the IHT account is submitted. The first instalment falls due on the normal IHT due date — 6 months after the end of the month of death. Subsequent instalments fall due on each anniversary of the first instalment date.
Each of the 10 instalments is equal — one-tenth of the total IHT attributable to the qualifying asset. The executor can always pay more than the required instalment (clearing the outstanding balance early), which stops further interest accruing on the amount prepaid.
For land and buildings, interest is only charged if an instalment is paid late. Paying each instalment on its due date means no interest accumulates. This is a significant concession: a £500,000 farm with a £70,000 IHT bill can spread the charge over 10 years (£7,000/year) at no interest cost, provided each instalment is paid on time.
For qualifying shares and businesses, the position may differ — interest can run from the original due date on the full outstanding balance. Executors should confirm the interest position with HMRC when elected.
Interaction with BPR, APR and the April 2026 Cap
Business Property Relief (BPR) and Agricultural Property Relief (APR) reduce the IHT bill on qualifying assets. From 6 April 2026, 100% BPR and APR are capped at £2.5m per person — assets above the cap attract 50% relief (20% effective IHT rate).
Where BPR or APR eliminates the IHT entirely (estate within the £2.5m cap, small estate below the nil-rate band), there is nothing to defer and the instalment option is not needed.
Where BPR or APR only partially covers the asset (e.g. a large farm above the cap, or a business that partially fails the BPR trading test), the instalment option applies to the IHT that remains after the relief. This will be increasingly common from April 2026 as large farming and business estates face a genuine IHT charge for the first time in years.
Frequently Asked Questions
What is the IHT instalment option and which assets qualify?
Under IHTA 1984 ss227–229, executors can elect to pay Inheritance Tax attributable to certain assets in 10 equal annual instalments instead of in a single payment. The first instalment is due on the normal IHT due date (6 months after the end of the month of death). The qualifying assets are: (1) Land and buildings of any kind — residential, commercial, agricultural, or woodland. (2) A business or interest in a business (sole trader, partnership). (3) Shares giving control of a company (voting control, typically more than 50%). (4) Unquoted minority shareholdings where the IHT attributable is at least £20,000 and the shares represent at least 10% of all shares, or the executor can demonstrate undue hardship in paying the full amount immediately. The instalment option is particularly valuable for illiquid estates — farms, family businesses, commercial property — where there are insufficient liquid assets to pay the full IHT bill without selling the core estate asset.
Does interest run on IHT paid by instalments?
Yes — interest applies on outstanding IHT under the instalment option, but the rules differ by asset type. For land and buildings: interest runs from the date each instalment falls due if that instalment is not paid on time. Crucially, if each annual instalment is paid on time, no interest accumulates — the outstanding unpaid instalments do not themselves attract interest between due dates. For businesses and qualifying shares: in some cases, interest runs from the original due date on the whole unpaid amount, depending on whether the asset is treated as interest-free or interest-bearing instalment property. HMRC's current IHT interest rate (applied to late payments) is based on the Bank of England base rate plus 2.5 percentage points and is updated quarterly. For estates with large unpaid IHT on land, choosing whether to pay each instalment on time or to pay off outstanding amounts early to stop interest is an important cash-flow decision.
What happens to outstanding instalments if the asset is sold?
If the asset subject to the instalment option is sold before all 10 instalments have been paid, all outstanding IHT immediately falls due — the instalment election ceases to apply to that asset. The executor must pay the remaining balance to HMRC promptly. This rule prevents the instalment option being used simply as a form of long-term tax deferral while the asset is converted into cash. The sale rule applies to: any sale of land, a sale of a business (or disposal of an interest in a business), a sale of shares. Where only part of the asset is sold (e.g. part of a farm), the outstanding instalments are apportioned and the proportion attributable to the sold part becomes immediately payable. The unexpired instalments on the unsold portion continue on the original schedule.
How does the instalment option interact with Business Property Relief and Agricultural Property Relief?
BPR (up to £2.5m at 100% from April 2026, then 50%) and APR (similarly capped from April 2026) reduce the value of the asset on which IHT is charged. The instalment option applies to the IHT that remains after BPR and APR reliefs. For example: a farm worth £4m where £2.5m attracts 100% APR and £1.5m attracts 50% APR leaves a chargeable value of £750,000 (50% of the £1.5m excess). After the nil-rate band (£325,000), the taxable amount is £425,000 and the IHT is £170,000. That £170,000 IHT is attributable to qualifying agricultural land and can therefore be paid in 10 annual instalments of £17,000. The IHT is still real — it just need not be paid in one lump immediately. Where BPR and APR apply at 100% across the whole estate, there is no IHT to defer, so the instalment option is moot.
Can the executors elect the instalment option after grant of probate?
The instalment option must be elected at the time the IHT account is submitted to HMRC — it cannot be elected retrospectively after the IHT has already been paid in full. The election is made on Form IHT400 (Inheritance Tax account) by indicating that the instalment option is being used for each qualifying asset. If the full IHT is inadvertently paid upfront without electing instalments, a claim for repayment may be possible in limited circumstances, but this is not guaranteed. Executors should therefore consider the instalment option carefully before submitting IHT400, particularly for estates including farms, businesses, or development land where liquidity may be limited.
Is the instalment option available on lifetime transfers (CLTs)?
The instalment option under ss227–229 applies to IHT arising on death. For Chargeable Lifetime Transfers (CLTs) — gifts into discretionary trusts — a separate instalment option exists under s226 IHTA 1984 for certain transfers, but it is more restricted. The CLT instalment option applies to transfers of qualifying business or agricultural property. For most executors dealing with a death estate, it is the ss227–229 option that matters. There is no instalment option for IHT arising on failed Potentially Exempt Transfers (PETs) — the clawback IHT on a failed PET falls on the recipient and is due within 6 months of the end of the month of the donor's death, with no instalment right.
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