As this article in the Daily Telegraph on Saturday explains, rising interest rates at HM Revenue and Customs (HMRC) is an often overlooked consequence of a rising Bank of England base rate. This can be an especially significant burden in the case of Inheritance Tax, which is often a particularly large one-off liability.

Inheritance Tax generally becomes due around six months after the event which triggers it (e.g. death). In the case of certain trusts, the transfer of assets into the trust, the ten-year anniversary of the trust or the distribution of assets can also result in a liability. Inheritance Tax is a self-assessment tax; which means that the onus is on the executors, personal representatives or the trustees to take advice and be aware of their deadlines and responsibilities in respect of the reporting and payment of the tax.

Missing deadlines can result in penalties and late payment interest being owed. For many years, with late payment interest being very low, many have been in for a surprisingly small interest rate burden for late reporting. However, as rates rise (and may continue to do so), there is certainly greater motivation to get the reporting and payment of tax out of the way early.

That said, there are very often circumstances where payment of Inheritance Tax up front is simply not practical. For example, in cases where much of the value in the estate (upon which the tax is levied) is tied up in illiquid assets such as a home or shares in a family investment business.

In those circumstances, HMRC often make the seemingly generous offer of allowing Inheritance Tax to be paid in ten annual equal instalments.  But, of course, there is a catch! Late payment interest continues to accrue at the prevailing rate on all remaining unpaid tax until the final sum has been paid. 

No doubt many families have made an easy and seemingly prudent decision over recent years to elect to pay Inheritance Tax over a ten-year period, to find that now that the interest accruing on any unpaid portion is rising fast.

So what is the solution? As with so many things, there isn't a single answer. All circumstances will be different and a tailored approach will be needed. Thankfully, HMRC currently charge simple interest rather than compound interest, so it can be much more cost effective (if still unpleasant) to accept the late payment interest rather than take out a loan on commercial terms. Equally, it may become more attractive to sell the asset or explore alternative arrangements for funding an Inheritance Tax liability early.  

The key, of course, is for the executors or trustees to thoroughly understand their options so they can make an appropriate decision and maintain a dialogue with beneficiaries as they see fit. With rising interest rates and still frozen Nil Rate Bands, this issue will likely affect more and more families in the years to come - especially those who haven't planned ahead.