Payment of inheritance tax: Why most people get the timing wrong

Death is expensive. It sounds harsh, but honestly, the paperwork that follows a passing is often more exhausting than the emotional toll. When someone dies, the government wants its cut, and they aren't exactly patient. If you’re dealing with the payment of inheritance tax, you’re probably realizing that the rules are a bit of a maze. Most people think they can just settle the bill once the house sells or the bank accounts are unfrozen.

That’s a huge mistake.

In the UK, for instance, HM Revenue and Customs (HMRC) expects their money before you even have the legal right to touch the deceased person's assets. It’s a classic "chicken and egg" problem. You need the Grant of Representation (Probate) to access the money, but you can’t get Probate until you’ve started the payment of inheritance tax. If you wait too long, the interest starts ticking. It's brutal.

How the clock actually starts ticking

You have six months.

Specifically, the deadline for the payment of inheritance tax is the end of the sixth month after the person died. If your Uncle Bob passed away in January, HMRC wants their check by the end of July. Don't mess this up. If you miss that window, HMRC starts charging interest. As of 2024 and 2025, those interest rates have been hovering around 7.75%, which is a massive drain on an estate's value.

It’s not just about the total sum, though. You don't necessarily have to pay every single penny upfront if the estate is tied up in "un-sellable" assets like a family home or a private business. HMRC allows you to pay in installments over ten years for those specific items. But—and there’s always a but—you still pay interest on the outstanding balance.

The Direct Payment Scheme (DPS)

Most banks are actually pretty chill about this. If the deceased had enough cash in a savings account, you can ask the bank to pay HMRC directly from that account before probate is granted. This is the Direct Payment Scheme. You fill out form IHT423, send it to the bank, and they wire the money to the taxman. It never touches your hands. This is the cleanest way to handle the payment of inheritance tax without losing sleep over interest rates.

What if there’s no cash?

This is where things get messy. Really messy.

Sometimes an estate is "asset rich but cash poor." Imagine a grandmother who lived in a £1.5 million cottage in the Cotswolds but had about £200 in her checking account. The tax bill is going to be massive—likely hundreds of thousands of pounds—and the family doesn't have it.

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You might have to take out a "Grant on Credit." This is basically begging HMRC to let you have probate so you can sell the house to pay them. They don't like doing this. You have to prove you’ve exhausted every other option. That means showing you tried to get a specialized probate loan from a lender like Tower Street Finance or a high-street bank and got rejected.

The numbers that actually matter

The Nil Rate Band (NRB) is your best friend. Currently, it’s £325,000. Anything below that? Zero tax. If you’re leaving a home to direct descendants (kids or grandkids), you get an extra £175,000 called the Residence Nil Rate Band.

So, a couple can potentially pass on £1 million entirely tax-free.

But if you’re a single person leaving a flat to a nephew, that extra residence boost doesn't apply. You’re stuck with the basic £325,000. Anything over that is taxed at a staggering 40%. It’s one of the highest tax rates in the UK system, and it catches people off guard constantly.

Gifting and the seven-year itch

You’ve probably heard of the seven-year rule. If you give away money and live for another seven years, that cash is outside your estate for the payment of inheritance tax purposes.

If you die after three years? Taper relief kicks in.

• 0–3 years: 40% tax
• 3–4 years: 32%
• 4–5 years: 24%
• 5–6 years: 16%
• 6–7 years: 8%

It’s a sliding scale of "glad I stayed healthy." But here’s the kicker: many people think the gift itself gets taxed. It doesn't. The gift just uses up your £325,000 allowance first. This is a common point of confusion that even some junior accountants trip over.

Common traps and how to dodge them

One of the biggest blunders is "Gift with Reservation of Benefit."

Say you "give" your house to your daughter to avoid tax but you keep living there rent-free. HMRC sees right through that. They consider it as if you still own the house. For that gift to be valid for payment of inheritance tax planning, you’d have to pay your daughter market-rate rent. And then she’d have to pay income tax on that rent. It’s a headache.

Another one? Life insurance.
If your life insurance policy isn't "written in trust," the payout goes into your estate. That means the insurance money intended to help your family actually increases the tax bill. If it’s in a trust, it bypasses the estate entirely and goes straight to the beneficiaries—usually within weeks, and totally tax-free.

Business and agricultural relief

If you own a trading business or a working farm, you might get 50% or even 100% relief. This is huge. The government doesn't want to force family businesses to close just to pay a tax bill. However, holding shares in an investment company (like a portfolio of rental properties) doesn't count. It has to be a "trading" entity. This is a nuance that saves—or costs—families millions.

Actionable steps for the here and now

Dealing with the payment of inheritance tax is basically a project management job. If you’re the executor, you need to move fast.

1. Locate the Will immediately. You need to know who the executors are and what the specific wishes were.
2. Get professional valuations. Don't guess what the house is worth. HMRC will check. If you undervalue it to save tax, they can slap you with penalties for "negligent misstatement." Get a RICS-qualified surveyor.
3. Check for "Inter Vivos" gifts. Scour the last seven years of bank statements. You need to report any gift over £3,000 per year.
4. Use the IHT400 forms. This is the big daddy of tax forms. It’s long, it’s boring, and it’s mandatory if there’s tax to pay.
5. Claim the "Transferable Nil Rate Band." If a spouse died years ago and didn't use their £325,000 allowance, you can claim it now. This effectively doubles your tax-free threshold. You have to actively claim it; HMRC won't just give it to you.
6. Pay a "Payment on Account." If you aren't sure of the exact total yet, send a chunk of money to HMRC anyway. This stops the interest from building up on that portion of the bill. You can always get a refund later if you overpaid.

The reality of payment of inheritance tax is that it’s a race against the calendar. The sooner you identify the liquid assets versus the physical ones, the sooner you can breathe. If you're feeling overwhelmed, hiring a probate practitioner or a specialist solicitor isn't a luxury—it’s usually a necessity to avoid massive interest penalties that the estate would have to swallow anyway.

Gather your documents. Call the bank. Start the clock before it starts you.