IHT Instalment Option UK (2026): Paying Inheritance Tax in 10 Annual Instalments on Land, Business, and Unquoted Shares

The instalment option allows the executor to pay inheritance tax attributable to qualifying assets over 10 years rather than as a lump sum: (1) THE BASIC RULE (IHTA 1984 s.227): where inheritance tax is payable on an asset that qualifies for the instalment option, the executor can elect to pay the IHT in TEN EQUAL ANNUAL INSTALMENTS rather than in one lump sum. The election is made by notifying HMRC on the IHT400 or IHT421; (2) THE FIRST INSTALMENT: the first instalment is due on the normal IHT payment deadline — 6 months after the end of the month in which the death occurred. For example: if the death was on any date in June 2026, the IHT due date is 31 December 2026. The first instalment is due on that date; (3) SUBSEQUENT INSTALMENTS: each subsequent instalment falls due annually on the anniversary of the first instalment — so 31 December 2027, 31 December 2028, through to 31 December 2035 (for a 2026 death); (4) EQUAL INSTALMENTS: each of the 10 instalments is one-tenth of the IHT attributable to the qualifying asset. The total IHT is the same — the instalment option is purely a timing mechanism, not a reduction; (5) ELECTION IS ASSET-SPECIFIC: the instalment option is elected asset by asset. If the estate has both qualifying and non-qualifying assets, the IHT on qualifying assets can be paid by instalments while the IHT on non-qualifying assets must be paid in full by the normal deadline; (6) PREPAYMENT: the executor can pay off the remaining balance of instalments at any time — paying the outstanding amounts early is always permitted. Interest stops accruing when the balance is cleared; (7) INTERACTION WITH PROBATE: HMRC issues an IHT421 confirmation once IHT has been paid or acceptably deferred. The Probate Registry will not issue a grant of probate until the IHT421 is produced. HMRC will issue the IHT421 once the first instalment is paid and the instalment election is in place.

The instalment option is only available where the IHT is attributable to certain categories of asset that are difficult to realise quickly — to prevent forced sales: (1) LAND AND BUILDINGS (IHTA s.228(1)(a)): the most commonly used category. All freehold and leasehold land — residential or commercial — qualifies. This includes: (a) the deceased's main residence; (b) a buy-to-let investment property; (c) commercial property; (d) agricultural land (whether or not agricultural property relief applies); (e) forestry; (2) A BUSINESS OR INTEREST IN A BUSINESS (IHTA s.228(1)(b)): the whole or a share of a business (sole trader, partnership) qualifies. This includes the goodwill, plant, machinery, stock, and debtors of an unincorporated business. A minority partnership share qualifies; (3) SHARES GIVING CONTROL OF A COMPANY (IHTA s.228(1)(c)): shares in a company that give the deceased a controlling interest (more than 50% of the voting power) qualify — whether quoted or unquoted. The control test is applied to the shares in the estate, not shares accumulated with other holdings; (4) UNQUOTED SHARES — LARGE IHT LIABILITY (IHTA s.228(1)(d)): unquoted shares (shares NOT listed on a recognised stock exchange) qualify if: (a) the IHT attributable to the unquoted shares exceeds £10,000; OR (b) the IHT attributable to the unquoted shares is 20% or more of the total estate IHT; AIM-listed shares are treated as unquoted for this purpose; (5) UNQUOTED MINORITY SHARES — HARDSHIP (IHTA s.228(1)(e)): where the estate includes unquoted shares that do not meet the s.228(1)(d) conditions, instalments may be available if the immediate payment of IHT 'cannot be paid without undue hardship' — a high threshold; (6) NON-QUALIFYING ASSETS: cash; UK quoted listed shares (except where giving control); gilts; life insurance proceeds; most foreign assets; bank deposits; pension lump sums. IHT on these must be paid in full by the normal deadline; (7) WOODLANDS (IHTA s.229): IHT on woodlands that have benefited from the woodlands relief can also be paid by instalments.

The interest treatment varies significantly depending on whether the qualifying asset is land or a non-land business asset: (1) LAND AND BUILDINGS — INTEREST ALWAYS RUNS: where the qualifying asset is land (including the main residence, investment property, or agricultural land), interest runs on the OUTSTANDING BALANCE of unpaid IHT from the normal due date. The current HMRC late payment interest rate is 7.25% per annum (as of 2026). Interest accumulates on each unpaid instalment and on the balance of the total IHT not yet paid. The interest element is NOT deductible for IHT purposes and represents an additional cost of using the instalment option on land; (2) BUSINESS INTERESTS AND UNQUOTED SHARES — INTEREST-FREE IF PAID ON TIME: where the qualifying asset is a business or interest in a business, unquoted shares (controlling or large minority), or woodlands, the instalments are INTEREST-FREE provided each instalment is paid on time. This is a significant advantage — using the instalment option costs nothing if the executor is disciplined about annual payments; (3) LATE PAYMENT: if any instalment is paid late, interest begins to run on the unpaid amount from the date the instalment was due — even for assets that are otherwise interest-free. Keeping a diary of instalment due dates is essential; (4) WHEN TO USE VERSUS NOT USE: (a) LAND — the 7.25% annual interest rate means the instalment option is expensive if used for a full 10 years. If the estate can raise cash (by selling other assets or borrowing against the property), paying in full may be cheaper than 10 years of interest; (b) BUSINESS/UNQUOTED SHARES — the interest-free nature makes the instalment option very attractive for illiquid business assets. Use it unless the business is to be sold quickly; (5) INTERACTION WITH BUSINESS PROPERTY RELIEF (BPR): if the qualifying asset also benefits from BPR (100% or 50%), the IHT attributable to the asset is reduced proportionately. The instalment option applies to the IHT actually payable after BPR — not the pre-BPR value.

Sale of the qualifying asset before all instalments are paid triggers immediate payment of the full outstanding balance of IHT: (1) SALE TRIGGERS FULL ACCELERATION (IHTA s.227(4)): if the qualifying asset (land, business, shares) is sold, the full unpaid IHT balance (all remaining instalments plus accrued interest) becomes due immediately — within 30 days of completion of the sale. The executor must notify HMRC and pay the outstanding amount from the sale proceeds; (2) WHY THIS RULE EXISTS: the instalment option exists to prevent a forced sale of an illiquid asset to pay IHT. Once the asset is sold, the liquidity rationale disappears — the estate has cash from the sale and there is no longer a hardship reason to defer; (3) WHAT COUNTS AS A 'SALE': (a) an outright sale to a third party for consideration; (b) sale at undervalue may still count; (c) a gift by the executor does NOT count as a sale — but it is unlikely to be permitted without express authority; (4) PART SALE: if only part of the qualifying asset is sold (e.g. one of several properties in a landed estate), the IHT attributable to that part must be paid from the sale proceeds. The instalment option continues for the remaining assets; (5) REFINANCING OR CHARGING: mortgaging or charging the qualifying property to raise cash (rather than selling) does NOT trigger acceleration of the instalments. The executor can borrow against the property to fund other estate liabilities; (6) PRACTICAL IMPLICATION: the instalment option is most suitable where the executor intends to retain the asset (continue the family business; keep the property). If the estate plans to sell in the short term, it may be simpler to sell, use the proceeds to pay IHT in full, and avoid the administrative complexity of the instalment regime.

Electing for the instalment option is straightforward — it is done on the IHT return and must be managed carefully over the 10-year instalment period: (1) ELECTION ON IHT400: the executor indicates the instalment election on the IHT400 (or IHT421 for simpler estates). Schedule IHT408 ('Assets subject to the instalment option') must be completed for each qualifying asset, showing its value and the IHT attributable to it. The election is made separately for each qualifying asset; (2) IHT421 AND PROBATE: HMRC issues the IHT421 (which the Probate Registry requires before issuing a grant) once the IHT has been paid or an instalment election is in place and the first instalment has been paid. IHT must be paid on non-instalment assets before HMRC releases the IHT421; (3) ANNUAL PAYMENT SYSTEM: once the election is made, HMRC will send annual reminders of the instalment due dates. The executor (or, after obtaining probate, the estate administrator) must ensure each annual payment reaches HMRC by the due date to avoid late payment interest; (4) RECORDS TO KEEP: (a) full IHT400 and all schedules filed; (b) HMRC's acknowledgement of the instalment election; (c) receipts for each annual instalment payment; (d) correspondence with HMRC on any variation; (5) CHANGE OF PERSONAL REPRESENTATIVE: if the executor is discharged or dies during the 10-year period, the successor PR (or residuary beneficiary) takes over responsibility for the remaining instalments. The obligation runs with the asset — if the asset is transferred to a beneficiary, the IHT remains a charge on the asset; (6) CHARGE ON ASSETS (IHTA s.237): unpaid IHT on qualifying assets is a statutory charge on the asset — HMRC has the right to recover unpaid IHT from the asset itself, even if it has been transferred to a beneficiary. The beneficiary takes the asset subject to this charge. This is an important reason for beneficiaries to keep up with instalment payments; (7) EARLY REPAYMENT: the executor can pay off all remaining instalments at any time. HMRC will issue a clearance certificate confirming the charge is discharged — important for conveyancing if the property is later sold.