Advanced Taxation (UK) · Inheritance tax: administration and payment, including the instalment option

Instalment Option for Paying IHT Explained

Updated 11 October 2026 · Fact-checked

The instalment option lets you pay inheritance tax on certain assets in ten equal annual instalments instead of one lump sum. It covers land and buildings, businesses, and certain shares. Interest may run on the unpaid balance, depending on the asset. If you sell the asset early, all outstanding tax is due at once.

Understand Instalment Option for Paying IHT

Inheritance tax (IHT) is normally due in one sum. That can be a problem when the value sits in an asset you cannot easily turn into cash, such as a family business or a building. The instalment option solves this. It spreads the tax on that asset over ten years, so the owner does not have to sell.

The option applies only to tax on certain assets. In broad terms these are land and buildings, a business or an interest in a business, and shares or securities that meet set conditions. Shares or securities qualify where they give control of the company. Unquoted shares that do not give control qualify only if one of the following is met:

HMRC accepts that the tax cannot be paid in one sum without undue hardship.
The holding passes a minimum size test in the legislation, based on the value of the shares or the tax on them.
The shares are of a specified type.

Cash, quoted minority shareholdings and personal items do not qualify. In the exam, check that the asset is of a type that qualifies before you offer instalments.

The tax is paid in ten equal annual instalments. For a death estate the first falls on the normal due date, which is six months after the end of the month of death.

For lifetime transfers, check who bears the tax. The option is available on a chargeable lifetime transfer only where the donee bears the tax, or where extra tax is due because the donor dies within seven years of the transfer. For a lifetime transfer, the first instalment is due six months after the end of the month of transfer. For a transfer made between 6 April and 30 September, it is due on the following 30 April.

The tax on a qualifying asset is the same proportion of the total tax as the asset's value (after any reliefs and exemptions that apply to it) is of the total chargeable value (after reliefs).

Interest depends on the type of asset, not on whether business property relief applies. Instalments on a business and on certain qualifying unquoted shares can be interest-free. Some land and buildings can be interest-free too, depending on how the land is held. Interest is charged on instalments of tax on other assets. Examples are non-business land and quoted shares that give control. Quoted control shares qualify for instalments, but they carry interest.

Where interest is charged, it runs on the tax still outstanding, including the instalment being paid, for the period since the previous payment date. So at the second instalment date the outstanding tax is the total tax on the asset less the first instalment. The interest falls each year because the outstanding tax falls as you pay each instalment. The first instalment, paid on the due date, carries no interest for that period.

The tax tables give no separate rate for interest on instalments. The question will normally tell you the rate to use. The 8.50% in the tables is only the assumed rate on underpaid tax, so do not present it as the instalment rate unless the question tells you to use it.

The instalments end early if the asset is sold. All tax still outstanding on that asset then becomes payable immediately, and any interest-free treatment ends. The person can still choose to pay early at any time.

Key rules to remember

Number of instalments: Ten equal annual instalments; The first instalment falls on the normal due date. Later ones fall each year on that date.
Tax attributable to the qualifying asset: Total IHT × (Value of qualifying asset after reliefs ÷ Value of total chargeable estate or transfer after reliefs); Apply the fraction to the total tax. Use values after any reliefs and exemptions that apply.
Annual instalment: Tax on qualifying asset ÷ 10; Round only at the end.
Interest on outstanding tax (where charged): Outstanding tax × rate given in the question × time in years; Use the rate the question gives, as the tax tables give no separate instalment rate. Apply it to all the tax still unpaid just before the instalment is paid, including that instalment, for the period since the previous payment date. At the second instalment date this is the tax on the asset less the first instalment.
Effect of sale: Remaining instalments become due immediately on sale; Applies to the tax on the asset sold.
Death rate and nil rate band: 40% on the excess over £325,000 (death); 20% lifetime; The residence nil rate band of £175,000 may also apply on death if the conditions are met.

How to solve Instalment Option for Paying IHT questions

Use this method for any question on paying IHT by instalments.

1Compute the total IHT first. Use the correct nil rate band, rate (40% death, 20% lifetime) and any reliefs.
2Decide whether the asset qualifies for instalments: land and buildings, a business, or shares that give control or are unquoted and meet the tests. For a lifetime transfer, check that the donee bears the tax or that the tax arises on death within seven years. Say why in one line.
3Work out the tax on the qualifying asset using the fraction of asset value over total value, both after reliefs.
4Divide that tax by ten to get the annual instalment. State the due date of the first instalment.
5Decide whether interest is charged for that type of asset. If it is, use the rate given in the question. The tax tables give no separate instalment rate, and 8.50% is only their assumed rate on underpaid tax. Apply the rate to the tax outstanding just before each instalment, including that instalment, not to the original tax.
6Deal with any sale: the remaining instalments are due immediately. Count how many are left.
7Give a clear conclusion and add one practical point, such as cash flow or a right to pay early.

Quickest way: Fraction, divide by ten, check interest

When to use it: Use when a question asks how much is payable each year, or what happens if an asset is sold.

Total tax × (asset value ÷ total value) gives the tax on the asset.
Divide by 10.
Ask: does interest run for this asset? If yes, apply the rate given in the question to the tax still outstanding just before that instalment is paid, including the instalment itself. For the second instalment that is the tax on the asset less the first instalment.
On a sale, multiply the instalment by the number still unpaid and say it is due now.

Common mistakes in Instalment Option for Paying IHT

Offering instalments on all of the tax.
Students forget the option only covers tax on qualifying assets.
Fix: Split the total tax by asset value first, and only spread the qualifying part.
Charging interest on the original tax every year.
It feels simpler to use one figure.
Fix: Apply interest to the outstanding tax, which reduces after each instalment is paid.
Saying all instalment tax is interest-free (or all carries interest).
Students learn one rule and apply it to every asset.
Fix: Link interest to the type of asset. A business and qualifying unquoted shares can be interest-free. Non-business land and quoted shares giving control carry interest. Do not link it to business property relief.
Ignoring the effect of a sale.
Students focus on the ten-year schedule.
Fix: Always check whether the asset is sold. If so, the remaining instalments are due immediately.
Applying the instalment option to a quoted minority shareholding or cash.
Students think any shares qualify.
Fix: Check for control, or that the shares are unquoted and meet the conditions, before allowing instalments.
Using the wrong rate or nil rate band.
Lifetime and death figures are mixed up.
Fix: Take £325,000, 20% and 40% from the tax tables and match them to the type of transfer.
Offering instalments on a lifetime transfer where the donor bears the tax.
Students apply the death rules to lifetime gifts.
Fix: For a chargeable lifetime transfer, allow instalments only if the donee bears the tax, or if the tax arises because the donor dies within seven years.

Worked examples

Example 1

Ravi died owning a chargeable estate of £1,200,000 including investment land worth £300,000. No exemptions or reliefs apply and no residence nil rate band is available. His executors elect to pay the tax on the land by instalments. Calculate the annual instalment and the total payable with the second instalment. Assume interest is charged on the instalments and the question tells you to use 8.50% a year on the outstanding tax.

Show the solution

Total IHT = (£1,200,000 − £325,000) × 40% = £875,000 × 40% = £350,000.
Tax on the land = £350,000 × (£300,000 ÷ £1,200,000) = £87,500.
Annual instalment = £87,500 ÷ 10 = £8,750.
The first instalment of £8,750 is paid on the due date, so it carries no interest for that period.
Just before the second instalment is paid, the outstanding tax is £87,500 − £8,750 = £78,750. This includes the second instalment.
Interest for the year at 8.50% = £78,750 × 8.50% = £6,693.75.
Second payment = £8,750 + £6,693.75 = £15,443.75.

Answer: The annual instalment is £8,750. The second payment, including interest at the 8.50% given in the question, is £15,443.75.

Example 2

Using the facts in the previous example, the executors pay the first three instalments on time and then sell the land. How much tax on the land is then payable, and when?

Show the solution

Instalments paid = 3, so instalments outstanding = 10 − 3 = 7.
Each instalment is £8,750.
Outstanding tax = 7 × £8,750 = £61,250.
The sale ends the instalment option, so this amount is due immediately, together with any interest accrued on it.

Answer: £61,250 of tax is payable immediately on sale, plus any interest due.

Exam tips

Show the fraction calculation for the tax on the asset. Method marks are given for it even if the total tax is wrong.
Name the asset type and say whether it qualifies. This is a clear technical mark.
State your interest assumption and show it on the outstanding tax. Use the rate the question gives. The tax tables give no separate instalment rate, so say if you have to assume one.
If the scenario mentions a possible sale, always mention that all outstanding tax then becomes due. This links to cash-flow advice.
In a Section A advice question, add a short comment on cash flow and the option to pay early. This helps the professional skills marks.

Practice questions from Inheritance tax: administration and payment, including the instalment option

Instalment Option for Paying IHT in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Applied SkillsPayment by Instalments

Instalment Option for Paying IHT: frequently asked questions

Which assets qualify for IHT instalments?

Broadly, land and buildings, a business or an interest in a business, and shares or securities that meet certain conditions. Shares that give control qualify. Unquoted shares without control qualify only if the hardship test, a minimum size test or a specified-type condition is met. Cash and quoted minority shareholdings do not qualify.

Is interest charged on IHT instalments?

It depends on the type of asset, not on whether business property relief applies. Instalments on a business and on qualifying unquoted shares can be interest-free. Interest is charged on other assets, such as non-business land and quoted shares that give control. Where interest is charged it runs on the tax still outstanding, including the instalment being paid, for the period since the previous payment date. The tax tables give no separate instalment rate, so use the rate the question gives. The 8.50% in the tables is only the assumed rate on underpaid tax.

What happens if I sell the asset before the ten years end?

All the tax still outstanding on that asset becomes due immediately. You do not carry on with the annual schedule.

Can I pay off instalments early?

Yes. You can pay any outstanding balance early. Doing so reduces the interest where interest is charged.