There has been a steep rise in inheritance tax (IHT) receipts according to the latest figures released by HM Revenue and Customs (HMRC). The increase, which sums to an additional £200 million, comes despite no changes to the tax thresholds, drawing a link to the rising property market and inflation. This report delves into the details behind this shift, providing a comprehensive look at the IHT landscape.
Key Points
- Recent HMRC data indicates a £200 million surge in inheritance tax (IHT) receipts in comparison to the previous year.
- An 11% growth in IHT collection was noted from April to June 2023, accumulating to £2.0bn.
- The surge in the housing market has contributed to the increase in IHT receipts, with the average UK house price rising by 2.1% to £286,000.
- The nil-rate band of tax per person remains at £325,000 since 2009, and any amount exceeding this limit is taxed at 40%.
- Spouse and civil partner exemptions, annual and lifetime gifts, and life insurance are effective ways to minimise the potential IHT bill.
There has been a steep rise in inheritance tax (IHT) receipts according to the latest figures released by HM Revenue and Customs (HMRC). The increase, which sums to an additional £200 million, comes despite no changes to the tax thresholds, drawing a link to the rising property market and inflation. This report delves into the details behind this shift, providing a comprehensive look at the IHT landscape.
A Look at the Numbers
| Year-on-Year Increase | Tax Collected (Apr-Jun 2023) |
|---|---|
| £200 million | £2.0 billion |
The numbers from HMRC have revealed an 11% growth in IHT collection during the period from April to June 2023 compared to the same timeframe in the previous year, amounting to a total of £2.0 billion.
The Housing Market and IHT
A factor contributing to this increase is the current state of the housing market. Despite the conclusion of the stamp duty holiday in September 2021, the market remains robust. HM Land Registry data indicates that the average UK house price has increased by 2.1% on the year, rising to £286,000, albeit at a slowing rate.
Current IHT Thresholds
Since 2009, the nil-rate band of tax per person has remained at £325,000 (£650,000 per couple who are married or in a civil partnership). This threshold refers to the amount of a person’s estate which is taxed at 0%, with any excess amount being subjected to IHT at 40% after considering any deductions, exemptions, and reliefs.
Despite rising inflation and soaring house prices, the 2021 budget declared no plans to increase the IHT thresholds until April 2026 at the earliest. This could potentially bring more estates into scope for this tax.
Tips to Reduce Inheritance Tax
Darran Harrison, Wealth Planner at Kingswood Group has offered these tips to lessen your exposure to IHT.
Using Spouse and Civil Partner Exemptions
Married couples and civil partners can make use of each other’s tax-free allowance without requiring special tax planning. All gifts and transfers between them living in the UK are IHT-free. In certain scenarios where the first partner passes away leaving their entire estate to the other in their will, no tax will be payable.
Making Annual and Lifetime Gifts
Single gifts of £3,000 per year, either to one person or split among several individuals, can be made completely free of IHT. This allowance can be carried forward one year if you don’t use up all your allowance.
Moreover, larger gifts of money, known as potentially exempt transfers (PETs), can be made at least seven years prior to death. But beware, the gift must be an outright one, and if the donor passes away within the seven-year period, IHT becomes payable on a sliding scale.
Taking Out Life Insurance
Life insurance can be a simple but effective way to cover an IHT bill. This involves taking out cover and placing it under trust, ensuring the payout does not contribute to your estate and exacerbates the tax situation.
Exploring Other Avenues
Other possible ways to reduce the IHT bill include gifts to political parties, charities, trusts, and contributions into private pensions. However, these routes require careful planning and advice.