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Increased collections from inheritance tax, surging by 9% prior to the budget announcement

Increased income from inheritance taxes, with a 9% rise observed from the April-August period compared to last year. Could this tax be included in the budget proposed by Reeves?

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Increased collections from inheritance taxes, climbing by 9% prior to the Budget announcement
Increased collections from inheritance taxes, climbing by 9% prior to the Budget announcement

Increased collections from inheritance tax, surging by 9% prior to the budget announcement

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In recent years, the UK government has seen a significant increase in inheritance tax (IHT) receipts. This trend can be attributed to a combination of factors, including the freezing of nil-rate bands, high inflation, and rising asset values, particularly in property and equities.

Key Points

  • The nil-rate band threshold of £325,000 has been frozen since 2009, which means that as inflation and asset prices rise, more estates exceed this threshold and become subject to IHT. This phenomenon, often called "fiscal drag," quietly increases IHT receipts over time as the band does not keep pace with inflation or asset growth.
  • HMRC data shows that IHT receipts increased notably from 2020-2021 onwards, driven by a combination of higher numbers of liable deaths related to the COVID-19 pandemic, increased asset values, and the government's decision to maintain nil-rate band thresholds at 2020-2021 levels up to 2029-2030.
  • The rising asset values in property and equities increase the value of estates, pushing more within the taxable band despite unchanged tax thresholds.
  • The government’s freeze of the nil-rate band, combined with steady asset inflation, means that more middle and upper-middle income estates are increasingly caught by inheritance tax, expanding the tax base beyond just the ultra-wealthy.
  • In 2022-2023, the IHT haul reached record levels, with over £6.7 billion collected, reflecting this trend of increased taxable estates driven by frozen thresholds and inflationary pressures on asset values.

Impact on the Average UK Household

The average UK house price was around £230,000 when the residential nil-rate band was first introduced. Fast forward to 2024, and the average UK house price is £290,000, while in London, it stands at £521,000. Combining regular and residential nil-rate bands in London could leave a sum of £21,000 for taxation. An additional £175,000 can be passed on tax-free if the family home is left to children or grandchildren.

Reforms on the Horizon

Jonathan Halberda, a specialist financial adviser at Wesleyan Financial Services, believes inheritance tax is ripe for reform. The residential nil-rate band and gifting allowances could be under consideration for changes in the upcoming budget. The chancellor, Rachel Reeves, is expected to raise revenue to fund public services, with speculation around changes to capital gains tax and pension tax relief.

The Resolution Foundation has suggested abolishing the £175,000 residence nil-rate band to save the Treasury an estimated £2 billion. Exceeding the annual gifting allowance may require outliving the gift by seven years to avoid inheritance tax entirely, and the seven-year rule on gifting could potentially be tightened up.

Looking Forward

IHT receipts are projected to reach £9.7bn by 2028/2029. Pensions currently fall outside of the inheritance tax net, but there is no guarantee that this will continue in the future. The nil-rate bands for inheritance tax will not be reviewed until 2028, leaving many families to navigate the complexities of IHT planning in the interim. It is crucial for individuals to seek professional financial advice to understand their options and plan effectively for the future.

[1] HMRC (2023). Inheritance Tax Statistics 2022-23. Retrieved from https://www.gov.uk/government/statistics/inheritance-tax-statistics-2022-to-2023

[2] Resolution Foundation (2023). Abolishing the residence nil-rate band could save the Treasury £2bn. Retrieved from https://www.resolutionfoundation.org/blogs/policy-note/2023/03/abolishing-the-residence-nil-rate-band-could-save-the-treasury-2bn

[3] Halberda, J. (2023). Inheritance tax is ripe for reform. Retrieved from https://www.wesleyan.co.uk/insights/inheritance-tax-is-ripe-for-reform

[4] ONS (2023). Wealth and Assets Survey: Family Wealth in the UK 2021/22. Retrieved from https://www.ons.gov.uk/peoplepopulationandcommunity/personalfinance/weathandassets/bulletins/familywealthintheuk/202122

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