It may be that only a few years ago you would have thought that Inheritance Tax was only paid by the wealthy.
Indeed, the facts would indicate that was the case. For example, the statistics indicate that for the period 2017/18 to 2020/21 the annual amount collected from IHT varied from £5.2bn to £6.1bn. By way of comparison between April 2021 and January 2022, Capital Gains Tax receipts stood at £7.67bn, rising to £10.4bn for the period over the last 12 months. Of greater significance according to the HMRC website receipts from PAYE Income Tax and NIC1 for April 2021 to February 2022 were £306.3bn.
As can be appreciated therefore, the IHT take is not large in the grand scheme of things, but that could be about to change over the next few years. Indeed, the IHT collected is estimated to climb 36 % to £37bn for the period from 2022 to 2027 according to the Office for Budget Responsibility’s economic and fiscal outlook.
There are several reasons for this but chief among them are:
Inheritance Tax Nil rate band (NRB)
This was set at £325,000 from April 20009 and has not been increased since, and in fact, like many other allowances, HMRC has announced that will not be altered until 6 April 2026 at the earliest.
Had this been indexed by inflation since 2009 the nil rate band would now stand at £430,000.
Naturally the longer that the NRB remains unchanged the more its value diminishes in real terms, and this will be exacerbated by the higher levels of inflation that are likely to occur between now and 2026.
Inheritance Tax Residence nil rate Band (RNRB)
This was introduced from 2017 and the exemption is now £175,000. It is in addition to the NRB and available broadly where a property or an interest in a property is left to a direct descendant.
For these purposes a direct descendant is:
- a child, grandchild or other lineal descendant
- a spouse or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)
This also includes:
- a child who is, or was at any time, their stepchild
- their adopted child
- a child fostered at any time by them
- a child where they’re appointed as a guardian or special guardian when the child is under 18
The Conservatives promised that families would be able to leave £1m without a charge to IHT, and the RNRB was introduced so that when it rose to £175,000 in April 2020 this exemption for two people together with two NRBs would reach the £1m figure.
Like the NRB the RNRB has not been indexed for inflation since 2020 and is not due to changed prior to April 2026. What may not be general knowledge is that the RNRB will gradually reduce, or taper away, for an estate worth more than £2 million, even if a home is left to direct descendants. The RNRB will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold and if the estate is worth £2,250,000 or more, the allowance will taper away completely.
These have increased dramatically over the period.
According to the Land Registry statistics the increase in house prices has been 75.8%. The FTSE 100 has increased around 36% up until 2021 and undoubtedly other asset classes have increased in value over the 13-year period.
While the majority of the elderly people passing away over the past ten years or so have not in themselves been liable to IHT, they have left substantial bequests to their offspring and other family members. These inherited sums received mainly by those in the age range of 55 to 70 and often homeowners, have served to increase the value of the beneficiary’s estate and push the value over the NRB and RNRB - this trend will only continue.
Having considered the reasons for the potential increase in IHT receipts what, if any action can be taken to reduce the IHT? Basic actions would of course include gifting, ISAs, potentially exempt transfers and business relief, which are areas I’ll cover next time.
While IHT is said to be a universally unpopular tax, it seems like it’s here to stay and a lot will be written and spoken about over it over the next few years. It’s undoubtedly an area where competent advice is required on the tax, legal and emotional consequences of planning.