Paying IHT by Instalments UK 2026: ss227-235 IHTA Option, Qualifying Assets, 10 Annual Payments, Interest, and When to Elect vs Pay in Full
Property-heavy estates often cannot pay the full IHT bill in 6 months without a forced sale. The instalment option spreads the IHT over 10 annual payments — interest-free for business assets; interest-bearing for investment property.
Critical Rule: Sell the Asset → All Outstanding IHT Immediately Due
If a qualifying asset (property, shares) is sold before all 10 instalments are paid, the full outstanding IHT balance falls due immediately. Elect instalments only if the estate will RETAIN the asset. If a sale is planned within 1-3 years: a bridging loan to pay IHT in full may be cheaper than paying HMRC interest on instalments and then repaying all outstanding IHT on sale.
| Asset Type | Qualifies for Instalments? | Interest on Instalments | Practical Notes |
|---|---|---|---|
| Land and buildings — used in the deceased's business | YES — s229 IHTA. All UK land and buildings qualify, including: residential property (main home, investment property, holiday home); commercial property; agricultural land (whether or not APR applies). The instalment option applies to the IHT attributable to the land/buildings after deducting any APR/BPR relief. | INTEREST-FREE if instalments are paid on time: land or buildings used in a business (sole trader, partnership, company) — agricultural land; land used in the deceased's trade. If instalments are NOT paid on time: interest accrues from the instalment due date at the HMRC late payment rate. | Most commonly used for the family home: e.g., estate comprises house worth £1.2m + modest savings. IHT of £350k on the house; no cash to pay in full. Elect instalments: 10 × £35k paid annually. No interest if the house is the main residence (not 'used in business'). EXCEPTION: if the house is used in the business (e.g., a farm dwelling): interest-free. If NOT used in business (standard residential property): interest-bearing. |
| Land and buildings — NOT used in a business (investment / residential property) | YES — s229 IHTA. Residential investment properties and commercial properties not used in the deceased's own business qualify for the instalment option — they are still 'land' under s229. | INTEREST-BEARING: HMRC late payment interest rate accrues on each instalment from the due date of that instalment. Currently: Bank of England base rate + 2.5% per annum (approximately 7.25% pa in 2026). Interest compounds annually on the outstanding balance. This is the main caveat: investment property instalments carry significant interest cost. | Comparison: HMRC interest rate (~7.25%) vs bridging finance rate (~8-10% pa). For investment property estates: if the executors can obtain a bridging loan at a lower rate than HMRC interest, paying IHT in full (via a bridging loan against the property) and then repaying the loan when the property is sold may be cheaper than electing instalments and paying HMRC interest. Calculate carefully for each case — bank rates and HMRC rates fluctuate. |
| Business or interest in a business (sole trader / partnership / LLP) | YES — s228(1)(a) IHTA. An interest in a business (sole trader, share of a partnership, LLP member's interest) qualifies for the instalment option. The business must be a qualifying business (not wholly or mainly dealing in investments). The IHT on the business interest net of BPR (if applicable) is eligible for instalments. | INTEREST-FREE: business assets are interest-free under the instalment option (provided instalments are paid on time). The policy rationale: forcing an immediate sale of a business to pay IHT would destroy the business; instalments allow the business to generate profits that fund the IHT payments. | Post-April 2026 FA 2026 BPR cap: for business interests above £1m (combined BPR+APR), BPR at 50% only on the excess. The instalment option applies to the residual IHT after BPR. Example: business worth £3m; BPR £1m at 100% (£0 IHT on first £1m), £2m at 50% BPR (£1m chargeable × 40% = £400k IHT). Instalment option: 10 × £40k pa on the £400k; interest-free. |
| Controlling shareholding in a company (quoted or unquoted) | YES — s228(1)(b) IHTA. Shares in a company where the deceased had a controlling interest (broadly: ≥50% voting rights; or in some circumstances, any shares giving the ability to control the company — s228(3) broader definition applies in some cases). Both quoted (Main Market) controlling shareholdings and unquoted controlling shareholdings qualify. | INTEREST-FREE: controlling shareholding — if the company is a trading company or a holding company of a trading group. Interest accrues if the company is an investment company (not a qualifying trading company). Where BPR applies (s105 IHTA — unquoted trading company): BPR relief may reduce the IHT to nil or a fraction — the instalment option applies to the residual IHT after BPR. | Practical use: a family company director dies owning 100% of a trading company worth £5m. BPR at 100% (pre-FA 2026 cap): IHT on company = £0. But if above £1m BPR cap (post-FA 2026): excess at 50% BPR → residual IHT on company shares. Elect instalments on the residual IHT — interest-free. The company continues to trade, generating profits that fund the instalment payments. |
| Unquoted shares — minority (not giving control) | YES but CONDITIONS: s228(1)(c) IHTA. Unquoted minority shares qualify for the instalment option ONLY IF at least one of: (i) the IHT attributable to the shares is ≥ £1,000; OR (ii) the shares represent ≥ 10% of all nominal capital of the company; OR (iii) the company is principally a business company (not investment — applies to companies with trading businesses). | Interest: if the company is a trading company → interest-free. If the company is an investment company → interest-bearing. In practice: most family company shares (qualifying for the instalment option via condition (iii)) are trading companies — interest-free. | AIM shares and the instalment option: AIM shares are treated as 'unquoted' for BPR purposes (s105(1)(bb)) but for the instalment option, they may also qualify under s228(1)(c). In practice: most AIM shares will qualify for 100% BPR (before FA 2026 cap) — so the residual IHT is nil and the instalment option is moot. Post-FA 2026 cap: AIM portfolios above £1m may have residual IHT above £1m cap — consider whether the instalment option is available on the residual. |
Paying IHT by instalments UK 2026. ss226-235 IHTA 1984. s226 IHTA: IHT due date — 6 months from end of month of death (for personal representatives); or, for lifetime transfers (CLTs), 6 months from end of month in which the transfer is made (or 30 April following the tax year of transfer if earlier). s229 IHTA: qualifying land and buildings — includes any land or building in the UK; also overseas land in some circumstances. s228 IHTA: qualifying business property — a business or interest in a business (sole trader, partnership share, LLP interest); shares in a company where the deceased had control (s228(1)(b)); unquoted shares meeting the conditions in s228(1)(c). s228(3): 'control' for instalment purposes — different from BPR 'control'; essentially shares carrying ≥50% voting rights, OR in some cases shares that give the ability to control the company (winding up rights). s230 IHTA: instalments on unquoted shares — additional conditions. s231 IHTA: land — agricultural and business use; interest-free if business use. s233 IHTA: late payment interest — HMRC official interest rate applied from the due date of each unpaid instalment. s234 IHTA: acceleration — if two or more instalments are outstanding, HMRC may demand immediate payment of the full outstanding balance. IHT400 box 85: instalment election on the IHT400. IHT421: probate summary — property schedule used in conjunction with instalment election. HMRC late payment interest rate 2026: Bank of England base rate + 2.5%; in 2026 approximately 7.25% pa (base rate 4.75% as at June 2026). Direct Payment Scheme (DPS): IHT423 — allows bank/building society to pay IHT before probate from the deceased's accounts; mutually exclusive with instalment option for the same asset (DPS pays in full; instalment option spreads payment). Interest overpayment: if executors pay instalments late and then challenge HMRC, interest cannot be reclaimed. Timber (s228(4)): timber standing or on the land is a qualifying asset; special valuation rules. National Heritage assets: heritage property with conditional exemption — if relieved, instalments are not needed; if a future chargeable event occurs (property sold, or conditions breached), IHT falls due on the event and the instalment option may be available at that point. Form IHT400 guidance: HMRC IHT400 Notes (April 2024 edition) — section 'Paying IHT by instalments'.
Frequently Asked Questions
Can you pay inheritance tax in instalments in the UK?
Yes — the instalment option (ss227-235 IHTA 1984) allows the IHT attributable to qualifying illiquid assets to be paid in 10 equal annual instalments. The first instalment is due on the normal IHT payment date (6 months from the end of the month of death). Qualifying assets: (1) all UK land and buildings (residential and commercial property, agricultural land); (2) a business or interest in a business (sole trader, partnership, LLP); (3) shares giving a controlling interest in a company; (4) unquoted shares meeting certain conditions (≥10% nominal capital, or IHT ≥£1,000, or trading company). IMPORTANT: if the qualifying asset is SOLD before all instalments are paid, the outstanding IHT immediately falls due in full. You must elect the instalment option on Form IHT400 (box 85). Interest: business assets and controlling shareholdings → interest-free if paid on time. Investment property (residential property NOT used in a business) → interest-bearing at HMRC late payment rate (~7.25% in 2026).
How do you pay inheritance tax on property if there is no money?
Several options: (1) INSTALMENT OPTION (ss227-235 IHTA 1984): if the estate includes UK property, elect to pay the IHT on the property in 10 annual instalments. First instalment due 6 months after death. Investment property: interest-bearing. Business-use property: interest-free. The estate does not need to sell the property to make instalment payments — the annual instalments can be funded from the estate's other income (rental income, investment income). (2) DIRECT PAYMENT SCHEME (IHT423): for cash assets — the deceased's bank/building society pays IHT to HMRC before probate is granted, releasing the estate (for UK property) for probate. (3) HMRC BRIDGING LOAN: not available — HMRC does not lend. (4) COMMERCIAL BRIDGING LOAN: the executors take a short-term loan against the property value, use it to pay IHT in full (obtaining probate), then repay the loan when the property is sold. Compare bridging loan interest (8-10% pa) vs HMRC instalment interest (~7.25%) to identify the cheaper option. (5) EQUITY RELEASE ON PROPERTY: executors can also use a solicitor's undertaking to pay IHT from the property sale proceeds — some mortgage lenders allow short-term finance on the estate property.
Is there interest on IHT paid by instalments?
It depends on the type of qualifying asset: INTEREST-FREE (if instalments paid on time): (1) a business or interest in a business; (2) shares in a company where the deceased had a controlling interest AND the company is a trading company; (3) land or buildings used in the deceased's own business (e.g., farm land, business premises). INTEREST-BEARING: (1) residential investment property (a property not used in the business); (2) commercial investment property; (3) controlling shareholdings in investment companies; (4) timber. Interest rate: HMRC official late payment rate — currently approximately 7.25% per annum in 2026 (Bank of England base rate + 2.5%). If instalments are NOT paid on time: interest accrues from the instalment due date on ALL asset types. For investment property with interest-bearing instalments: calculate whether a commercial bridging loan (typically 8-10% pa) is cheaper or more expensive than the HMRC instalment interest — the answer depends on market conditions and the specific bridging rate available.
What happens to IHT instalments if you sell the property?
If the qualifying asset (e.g., a property) is SOLD before all 10 annual instalments have been paid: ALL outstanding IHT on that asset immediately falls due and must be paid within 6 months of the sale. The instalment benefit ends at the point of sale — HMRC treats the sale as an acceleration event. This is an important caveat: the instalment option is only beneficial if the estate retains the qualifying asset throughout the 10-year instalment period. If the estate intends to sell the property (even in the medium term): the instalment option may not provide the anticipated benefit. In practice: for family homes that will be retained (no sale planned), the instalment option spreads the IHT over 10 years. For investment properties that will eventually be sold: the instalment option provides a payment deferral only until sale — and HMRC interest accrues in the meantime. Decision: if a sale is imminent (within 1-3 years), it may be simpler to use a bridging loan to pay IHT upfront, avoid HMRC interest, obtain probate, and repay the bridging loan from the sale proceeds.
How do executors elect the instalment option for IHT?
The instalment option is elected on Form IHT400 (the full IHT account): box 85 asks 'Do you wish to pay the tax on any assets by instalments?' — tick 'Yes'. Additional schedules: Schedule IHT421 (Probate summary) — for land and property; Schedule IHT418 — for business assets; Schedule IHT417 — for foreign assets (if overseas land). The election must be made on the IHT400 at the time of filing. Late election: it is possible to make a late election in some circumstances — contact HMRC. Once elected: HMRC will issue payment references and instalment due dates. Each annual instalment is paid online or by cheque to HMRC with the estate reference. If an instalment is missed: HMRC late payment interest accrues from the due date. Two or more consecutive missed instalments: HMRC can demand the full outstanding balance immediately (s234 IHTA — acceleration on default). The instalment option applies only to the IHT attributable to the qualifying assets — the IHT on non-qualifying assets (cash, shares, etc.) must still be paid in full at the 6-month deadline.
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