Taxation (UK) · Payment of inheritance tax
Interest and Penalties on Late Inheritance Tax
Updated 11 October 2026 · Fact-checked
Inheritance tax paid after its due date carries interest from the due date until payment. In TX-UK, use the rate of 8.50% on underpaid tax and 3.50% on overpaid tax. Calculate tax × rate × time paid late. Penalties for errors use the standard percentages given in the exam tables.
Understand Interest and Penalties on Late Inheritance Tax
Inheritance tax (IHT) must be paid by a due date. If it is paid late, HMRC charges interest. This compensates the Government for the delay. It is not a penalty.
The exam gives you assumed rates of interest. The rate on underpaid tax is 8.50%. The rate on overpaid tax is 3.50%. The official rate of interest is 3.75%, but that is used for the beneficial loan benefit, not for IHT interest.
Interest on unpaid IHT runs from the due date until the date the tax is actually paid. It does not run from the date of the gift or the date of death. You must first work out the due date, then count the period of delay. If HMRC repays too much tax, interest on the overpaid amount is paid at the lower rate.
Penalties are a separate matter. If a taxpayer submits an incorrect return or account, the standard penalties for errors apply. The exam table links the maximum and minimum penalty to behaviour: careless, deliberate but not concealed, or deliberate and concealed. The tables you are given set out no fixed percentage penalty for late payment of IHT. So in IHT questions, interest is the main late payment cost.
Key rules to remember
- Interest on underpaid tax
- Tax paid late × 8.50% × (period late ÷ 12 months)
- Run the period from the due date to the payment date. Use months or days as the question suggests.
- Interest on overpaid tax
- Tax overpaid × 3.50% × (period ÷ 12 months)
- This is the lower rate. It is paid to the taxpayer.
- Official rate of interest
- 3.75%
- Do not use this for late IHT. Use 8.50% or 3.50%.
- Standard penalties for errors
- Careless: max 30%, min 0% unprompted, 15% prompted. Deliberate but not concealed: max 70%, min 20% unprompted, 35% prompted. Deliberate and concealed: max 100%, min 30% unprompted, 50% prompted.
- Applied to the extra tax from the error, not to late payment alone.
How to solve Interest and Penalties on Late Inheritance Tax questions
Use this method for any question on interest on late IHT.
- 1Identify whether tax was underpaid, paid late, or overpaid. This decides the rate.
- 2Find the due date. For death, it is six months after the end of the month of death. For lifetime transfers, check the date of the transfer.
- 3Find the date the tax was actually paid, or the date it is being calculated to.
- 4Count the period of delay from the due date to the payment date, in months or days.
- 5Apply the formula: tax × rate × period ÷ 12 (or ÷ 365 for days).
- 6Round to the nearest £, as the exam instructions allow.
- 7If the question mentions an incorrect return, check the behaviour and apply the penalty table separately.
Quickest way: Rate, base, time
When to use it: Use it for multiple-choice questions on late IHT where the tax and the delay are given.
- Pick the rate: 8.50% if tax is unpaid, 3.50% if tax was overpaid.
- Write the tax amount as the base.
- Count whole months late from the due date.
- Multiply base × rate, then × months ÷ 12.
- Check that you did not start the clock at the date of death.
Common mistakes in Interest and Penalties on Late Inheritance Tax
Using the official rate of 3.75% for late IHT.
It is the first rate listed in the interest table.
Fix: Underpaid tax uses 8.50%. Overpaid tax uses 3.50%.
Starting the interest period at the date of death or gift.
Students link interest to when the liability arose.
Fix: Interest runs from the due date for payment, not from when the liability arose.
Using the underpaid rate for a refund.
Students assume one interest rate covers everything.
Fix: Overpaid tax earns 3.50%, lower than the 8.50% charged on underpaid tax.
Forgetting to divide by 12 for a part-year.
The rates are annual and students apply them as a flat charge.
Fix: Multiply by months late ÷ 12 every time.
Calling interest a penalty, or adding a late payment penalty percentage that is not in the tables.
Students mix up VAT and IHT rules.
Fix: State that interest compensates for delay. Use the penalty table only for errors, and use the VAT penalty table only for VAT.
Worked examples
Example 1
Alan died on 14 March 2026. IHT of £48,000 is due on 30 September 2026. It was paid on 31 December 2026. Calculate the interest on the late payment, using the rate for underpaid tax.
Show the solution
- The tax is paid after the due date, so use the 8.50% rate.
- Interest runs from 30 September 2026 to 31 December 2026, which is 3 months.
- £48,000 × 8.50% = £4,080 for a full year.
- £4,080 × 3 ÷ 12 = £1,020.
Answer: Interest is £1,020.
Example 2
HMRC repays £6,000 of IHT that was overpaid. The money had been held by HMRC for 6 months. Calculate the interest due to the taxpayer, using the rate for overpaid tax.
Show the solution
- Tax was overpaid, so use the 3.50% rate.
- £6,000 × 3.50% = £210 for a full year.
- £210 × 6 ÷ 12 = £105.
Answer: Interest of £105 is paid to the taxpayer.
Exam tips
- Memorise the two rates: 8.50% for underpaid tax and 3.50% for overpaid tax. The exam provides them, but know which is which.
- Always write the due date first. It earns marks and prevents timing errors.
- In objective tests, check the period unit. Months and days give different answers.
- For a constructed response, state the rate used and show the multiplication. Method marks are available.
- Do not invent a late payment penalty for IHT. Use only the percentages in the tables given.
Practice questions from Payment of inheritance tax
- Lena made a chargeable lifetime transfer of land to a discretionary trust and IHT is due on it. Which statement about paying this IHT by ins…
- HMRC repays £20,000 of inheritance tax that was overpaid, and the repayment is made three months after the overpayment. Using the rates in t…
- Hamid died in March 2026 leaving a taxable estate of £700,000 to his friend. He made no lifetime transfers. His nil rate band is £325,000. R…
- Tax of £12,000 on a lifetime chargeable transfer was paid exactly six months after its due date. Using the rates in the TX-UK tax tables, wh…
- Omar died on 10 May 2026 with a chargeable estate of £760,000, which includes his home worth £300,000 left to his son. He made no lifetime t…
Interest and Penalties on Late Inheritance Tax in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Interest and Penalties on Late Inheritance Tax: frequently asked questions
What rate of interest applies to unpaid inheritance tax in TX-UK?
Use the assumed rate on underpaid tax, which is 8.50%. It is given in the rates of interest table in the exam.
Does IHT interest run from the due date?
Yes. Interest on late IHT runs from the due date for payment until the tax is paid. It does not start at the date of death or the gift.
What rate applies to overpaid inheritance tax?
The rate on overpaid tax is 3.50%. It is lower than the rate on underpaid tax.
How do I calculate interest on unpaid inheritance tax?
Multiply the unpaid tax by 8.50%, then by the number of months late divided by 12. For example, £48,000 × 8.50% × 3 ÷ 12 = £1,020.