Inheritance Tax

Inheritance Tax revenues on the rise

With the latest HMRC statistics showing that the amount of Inheritance Tax paid in October 2020 was 17% higher than a year ago, rising from £489 million to £570 million, Peter Webb, our Head of Tax Advisory, explores what the future holds for this important area of financial planning.

Inheritance Tax revenues have been continuously growing since the 1980s (apart from a dip in 2008) even though there have been increases in the tax allowances available. The rises are largely due to the increase in wealth of individuals and the size of their taxable assets, particularly given the rise in UK house prices.

It’s clear from these new statistics that more people are paying more Inheritance Tax on their estates, even with the introduction of the allowances including the Transferable Nil Rate Band in 2007/08 and the Main Residence Nil Rate Band in 2017/18.

What is Inheritance Tax?

Inheritance Tax is the amount of tax due on your property, money and possessions when you die. Inheritance Tax (IHT) can also be due and charged retrospectively on any gifts made in the last seven years of your life. It may also be payable on gifts made to most types of trust throughout your lifetime. There’s usually no IHT payable if the estate is worth less than the IHT threshold of £325,000 – or if anything (above the £325,000 threshold) is left to a spouse, civil partner or charity. IHT is, generally with some exceptions, charged at a standard rate of 40%, and is calculated based on your domicile.

What does the future hold for Inheritance Tax?

There have been discussions of a reform of the IHT regime, especially given the Nil Rate Band of £325,000 has been frozen since 2009/10, and various other allowances have remained the same since the 1980s. Some recommendations have already been made – including reducing the number of years that you can make a tax-free gift before your death from seven to five and aligning the rules on the definition of a ‘trading company’ so that they match Capital Gains Tax legislation. In addition, the Office of Tax Simplification has proposed that the various allowances currently available when gifting to individuals are replaced by one single allowance per person per year. If this is adopted, our hope is that this single gift allowance will exceed £3,000 given that the annual limit has been in place since the 1980s. Had the annual limit increased in line with inflation, it would now be approximately £12,000.

Many are keen to see a revamp of the IHT regime and it’s clear that some of the allowances in place need updating and can be confusing. We do expect that the Treasury will focus on this area of tax planning in the next few years but it’s likely to take some time for any proposals to become law.

In the meantime, it’s important to consider how you can reduce your IHT exposure. With careful tax planning and timely gifts to intended beneficiaries you may be able to take advantage of allowances and reduce, or even eliminate, your IHT  bill.

For more information about IHT, or to understand how you can reduce IHT visit our Resource Library and download a copy of our Guide to Inheritance Tax.