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HMRC internal manual

Inheritance Tax Manual

Rates of interest: background

Initially the rates of interest per annum were prescribed by IHTA84/S233 (2). These were amended from time to time by Statutory Instrument. To begin with there were two rates (IHTM30353), the rate applicable depending on the nature of the chargeable transfer or event. However SI 1986 No 1944 changed this and introduced a new single rate from 16 December 1986.

FA89/S178 (1) introduced a new and simpler procedure for setting interest rates for the various taxes, including IHT (and CTT and ED). Consequential amendments were made to IHTA84/S233 and 246.

Under the FA 1989 procedure interest rates are computed by formulae, each covering different taxes. FA89/S178 (1) of the Act enables the Treasury to publish Regulations setting out the formulae (which are based on bank base lending rates) and providing that the rate of interest on unpaid tax shall be increased or decreased automatically in line with general changes in market interest rates. When a change occurs under this mechanism the new rate of interest is set out in an Order made by the Board.

The Order also states the date from which the new rate has effect. The Treasury made regulations under its power in FA89/S178 to take effect from 18 August 1989. They did not involve any immediate change in the rate of interest on unpaid IHT, CTT and ED.