Inheritance tax (IHT) receipts reached £3.9bn from April 2023 to September 2023 a £400m increase from the same period last year.
IHT receipts have seen an upward trend over the last decade being fuelled by years of soaring house prices and frozen allowances.
Non-advisory broker Wealth Club have calculated that the average bill could increase to £233,000 this 2023/24 tax year with over 30,000 families having to give part of their inheritance to the tax man.
Nichloas Hyett investment manager at Wealth Club, said: “Inheritance tax has found itself the unexpected centre of the UK’s political battlefield.
“The tax pulled in over £7bn for HMRC last year and the most recent set of numbers suggests that’s set to climb again. Both the average bill and the number of families paying inheritance tax are also set to rise in the years ahead according to Wealth Club research.
“Depending on your political position that is either a good or a bad thing. But, whether you think inheritance tax is a great means of wealth redistribution or an unfair tax on those who’ve already been taxed once – the future of the UK’s most controversial tax is worth arguing about.”
Lack of understanding of IHT
The Office for Budget Responsibility’s (OBR) latest forecasts suggest that IHT will raise as much as £8.4bn in 2027/28 meaning that increasing numbers of estates are expected to fall prey to the tax in coming years.
However, research by retirement specialist Just Group released this week highlighted the lack of understanding among retirees about the current thresholds and IHT rules.
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Stephen Lowe group communications director at Just Group, said: “Inheritance Tax may turn out to be the government’s magic porridge pot, as the freeze on thresholds until 2028 combined with the 30% increase in property prices over the past six years push increasing numbers of estates into paying the tax.
“Our research finds that a worrying number of retired people don’t have a firm grasp of the Inheritance Tax rules which could leave many families with a nasty surprise.
“The majority (59%) of retirees over 55 said they don’t know what the threshold is for the value of an estate to pay Inheritance Tax and a further 50% of this age group don’t have a clear understanding of the rules.”
Rumoured scrapping of IHT
The Government has been rumoured to be looking at abolishing IHT potentially as soon as the Autumn Statement.
Laura Hayward tax partner at Evelyn Partners commented on this, saying: “The prospect of abolishing IHT has been bounced around as an idea for a Conservative election manifesto pledge and while the Chancellor has been playing down the prospect of imminent tax cuts, it’s not impossible that he could pull a small IHT rabbit out of the hat at the autumn statement, with something like a raising of the nil-rate band.
“An immediate concern for many families is that more and more are being dragged into paying IHT by stealth as a result of a number of factors, including allowances being frozen until at least 2028 and inflationary growth of asset values.”
Frozen nil band rate
Laura Suter head of personal finance at AJ Bell explains how the nil rate band would be close to half a million per person from April next year based on September CPI figures, had it tracked with inflation but stands frozen at £325,000.
Suter said: “It means that estates are being hit with almost £70,000 of extra inheritance tax thanks to the frozen rate. Had the rates been raised with inflation a couple would be able to leave an estate worth £1m free of inheritance tax without having to navigate the complications of the residence nil rate band (RNRB).
“The RNRB, introduced by George Osborne in 2017, means that now a couple can leave a £1m estate free of inheritance tax, but only if they fit the criteria to use the RNRB and understand how to use it.
“Osborne’s plan was to give a bigger tax break to individuals, but by introducing a new allowance with complicated criteria rather than just extending the existing one, he has introduced vastly more complexity to the inheritance tax system. Many people are not eligible for the RNRB, meaning they are stuck with an IHT allowance from 2009.
“But even the RNRB has been frozen in time since 2020 when it was fully phased in. Had it been raised in line with inflation, along with the nil rate band being increased with inflation since 2009, a couple could pass on an estate worth £1,423,000 combined.
“The fact that both rates have been frozen means estates are paying up to £169,000 more in inheritance tax than they otherwise would.”