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Inheritance Tax receipts have doubled since 2012

The latest data from HMRC shows that Inheritance Tax (IHT) receipts from the Treasury have doubled in the last decade.

While it was once seen as something that only the wealthy would have to worry about, more and more people are finding themselves liable for IHT.

But what exactly is an Inheritance Tax receipt, and why are so many people having to pay?

This blog explains what’s going on with IHT and what you can do to reduce your own liability.

What is IHT?

Though it has a reputation as a highly hated tax, IHT
gathers a relatively small amount of revenue for the Exchequer – just 1%
of what Income Tax, VAT, and National Insurance produce.

It’s also disliked due to confusion over what this tax actually is, which isn’t helped by the misleading name. As its former name suggested, it’s more of a capital transfer tax.

When someone passes away, IHT is charged on the transfer of their estate. This is currently 40% of the value of the deceased’s money, property, and possessions over £325,000.

The tax usually doesn’t apply if the deceased leaves their estate to their spouse, and the tax-free threshold increases to £500,000
if the recipients are their children or grandchildren. This means that IHT
normally won’t affect married couples with children unless their estate exceeds £1 million.

Since the majority of UK citizens won’t leave an estate with a value higher than these thresholds, Inheritance Tax hasn’t been as much of a concern for many people.

If this is the case, though, then why have IHT receipts
been increasing so much?

What do the IHT statistics show?

The latest official figures show that IHT receipts have risen from just over £3 billion in the 2012–2013 tax year to just over £6 billion in the 2021–2022 tax year, effectively doubling in just under ten years. While this might initially seem unusual, the government suggests several reasons for it.

Firstly, the IHT nil rate band has been frozen since 2009, and will stay frozen until April 2026. This band is the £325,000
allowance mentioned above. While this has stayed the same for over a decade, house prices haven’t – so inflation has been steadily pushing more estates over the threshold.

Secondly, the larger increases that happened throughout 2020
and 2021 are likely due to the effects of the COVID-19 pandemic. The number of deaths during these years was much higher than usual, resulting in a higher number of wealth transfers that are liable for Inheritance Tax.

The rise in receipts from 2017–2018 followed by a drop in 2019–2020 was also due to circumstantial changes. A probate fee increase due to take effect in April 2019, which was later cancelled, caused some estate executors to bring their IHT payments forward into the 2018–2019 tax year to avoid it.

Then, the gradual introduction of the residence nil rate band threshold led to a fall in receipts in the 2019–2020 tax year. This offers an extra allowance of £175,000 when qualifying residences are passed on to direct descendants (with a taper for residences worth more than £2 million).

According to the government’s commentary on the Annual Bulletin, the statistics show that IHT receipts are now overall at the highest level on record.

How to reduce IHT liability

There are plenty of legal methods for mitigating your IHT
burden. For example, if you leave 10% or more of your Will’s ‘net value’ to charity, then your estate will be taxed at 36% instead of 40%.

Or, if you’re a small business owner, you may be eligible for ‘business relief’ – allowing you to pass on certain business assets either IHT-free or with a reduced IHT rate. You may need to consult an accountant if you aren’t sure whether or not your business qualifies.

If you have children and grandchildren, you could make the most of several tax-free gift allowances. You can give away up to £3,000
a year to family members, plus gifts of up to:

  • £5,000 per child
  • £2,500 per grandchild or great-grandchild
  • £1,000 for wedding gifts
  • £250 for anyone who hasn’t received any of the above

However, some financial gifts are only exempt from tax if the giver survives for 7 years. If you were to pass away within this period after gifting such sums of money, the recipients would have to pay IHT
– starting at the standard 40% within 3 years then tapering to 0%
by the 7-year mark.

It’s up to each individual or couple to decide what they want to leave behind for their children, grandchildren, or other family members when they pass away. If you want to ensure that as much of your estate goes to the people you love as possible, then financial planning is a smart move.

It’s always a good idea to prepare an up-to-date Will, gift excess income and assets while you’re living, and even consider putting your assets into a Trust. If you’re in need of professional advice to help you preserve your estate for your family, why not contact GBAC, accountants in Barnsley, today?