Penalties for Submitting Late Inheritance Tax Returns
Published / Last Updated on 09/10/2024
We thought it was timely to update users with late filing penalties and other consequences for late filing of inheritance tax returns and what happens if you are going to be more than 12 months and then 2 years late for filing IHT returns and late payment of any IHT due.
Firstly, you have 12 months to file IHT returns to avoid late filing penalties. You should, even if you do not have exact values but estimated valued still file on time to avoid penalties and pay estimated IHT due to avoid or even minimise penalties. Any estimated values and underpaid IHT can be amended later if actual values are then found to be lower or higher when final returns are made. This will avoid late filing penalties and late payment interest will only be charged on any underestimated IHT due rather than the whole.
Savings, Dividends or Other Income Earned During the Administration Period
Some assets will continue to generate income after the death until you transfer or sell them. This could be:
- Interest or dividend payments on savings, shares and other investments.
- Rental income from property, profits and payments from the deceased’s trade or business,
- Executors or personal representatives must pay Income Tax on the full amount of income the estate receives between the day after the death and the date estate is distributed.
- Estates do not get receive any tax free allowances on income or dividends.
- Estates pay income taxes at the basic rate of income tax of 20% on ‘normal’ income and 8.75% on dividend income.
Late Filing Penalties for IHT 400 Returns (and Estate Accounts) After 12 months
There will be penalties for late filing of IHT 400 (should be within 12 months) even if no IHT is due:
The penalty is for late filing is £200 after 12 months (i.e., just 1 day late) (under s. 245(2)(a) and (3)) plus £400 for each month (or part month) beyond the period of 12 months after the due date for delivery, up to a maximum of £3,000 (under s. 245(4A)). This is capped at a maximum late filing penalty of £3,000.
Interest Charged on Late Payment of IHT Bill if IHT is Due
The current interest rate charged by HMRC is 7.5% (as at August 2024). We did a sample calculation on the HMRC website based upon a death in December 2022 and filing IHT return today (some 22 months late) for e.g. just £10,000 IHT due.
Inheritance Tax interest calculator - Start date for interest: 10/12/2022, End date for interest: 11/10/2024, e.g. Inheritance Tax Bill due on day 1= £10,000.
Result: The interest due from the figures supplied = £1,338.94. That’s £1,338.94 interest penalty per £10,000 IHT due as at today. If the estate owes £20,000, £30,000 or £40,000 then double, treble or quadruple up this figure.
Late payment interest can build up very quickly.
The Effect of Being 2 Years Late:
Must Register the Estate with HMRC TRS After 2 Years (if not settled/probate granted)
- A Will is technically a trust i.e., money/property/estate is held in trust by the executor for distribution to beneficiaries (not an explicit or ‘complex’ trust such as a Nil Rate Band Trust, Discretionary Trust or a Child/Minor/Vulnerable Person’s Trusts) but, by default it is already a non-complex/simple trust that is exempt from HMRC’s Trust Registration Service (TRS) for up to 2 years.
- After 2 years, you must register the unsettled estate (simple trust) with HMRC and secure a Unique Tax Reference (UTR) number to then file annual tax returns.
Ability to Amend the Will (if beneficiaries agree)
A Deed of Variation of the Will is not allowed after 2 years meaning you cannot make amendments to the distribution of the estate if it may be beneficial for future estate planning of the beneficiaries. For example, an adult (child of the deceased) beneficiary may not wish to inherit the money or wealth and may wish to bypass themselves to pass the inheritance onto their children (the grandchildren of the deceased). This can only done within 2 years of death.
There is no excuse for late filing given the penalties and interest charged given you can file IHT returns on time with estimated figures initially meaning executors have the means to avoid late filing penalties and much of any late payment interest (even if the estate is complex). There can be no excuse for late filing or payment and avoiding ‘wasting’ money that beneficiaries could have benefitted from.
