Inheritance tax receipts up £0.6bn in April

HM Revenue & Customs (HMRC) revealed in its latest financial report that inheritance tax (IHT) had risen once again. The report showed that IHT intake totalled £0.6bn in April, up £0.1bn from last April’s figure (HMRC: June, 2023).

This follows the record-breaking £7.1bn that was raised by IHT receipts in the 2022/23 tax year, suggesting the possibility of yet another record-breaking tax year to follow.

HMRC’s reports have revealed a 14% and 17% increase in the last two years respectively for IHT receipts. The total levied by the Government is growing by nearly £1bn every year as an increasing number of people are falling into the ever-widening IHT net. 

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What is Inheritance Tax? (IHT)

Inheritance Tax (IHT) is a tax levied by the Government on the estate of a deceased person in the UK. This includes all of their assets including property, personal belongings, investments and some lifetime gifts. 

However, this levy only applies to the total value of the estate that exceeds the IHT threshold or ‘nil-rate band’. As of the 2023/24 tax year, the threshold is set at £325,000 per person or £650,000 for a married couple. Anything above £325,000 could be subject to up to 40% inheritance tax.

In addition, the residence nil rate band (RNRB) was introduced in 2017 and is an amount added to the standard nil rate band. This currently stands at £175,000 per person and £350,000 for a married couple. If a person's estate value exceeds £2 million, the RNRB is reduced by £1 for every £2 over £2 million, therefore anyone with an estate valued in excess of £2.35 million will not be able to benefit from the RNRB. This is only available when passing down to direct decedents as it was established to try to protect the family home from inheritance tax.

Why are IHT receipts continuously on the rise?

The number of estates across the UK that are being pulled into the IHT net are increasing each year. In the main this is due to rising property values but also the freeze on allowances.

The freeze was initially announced by the then-Chancellor, Rishi Sunak, in his 2021 Budget. The Budget outlined that the IHT threshold (among other thresholds and allowances) would be frozen for five years until 2026. However, after Chancellor Jeremy Hunt’s Autumn Statement, it was confirmed that the freeze would be extended a further two years until April 2028.

As it stands for the current tax year 2023/24, you will only have to pay inheritance tax if the value of your estate exceeds £325,000. Anything below this threshold is tax-free, anything above and you may be subject to a tax charge of 40%. However, due to the rising inflation coupled with ever increasing property values across the UK, the freeze essentially means that a greater number of people will cross the inheritance tax threshold each year. Many have been calling this move an example of ‘shadow tax’, as the freeze ultimately means an increasing number of Britons will fall into the tax threshold each year until the freeze ends in April 2028, and by then the Government will have collected billions in extra tax that they may not have otherwise done so if these allowances had increased in line with inflation. 

Other contributing factors include the pandemic and the resulting strain on the NHS, which has meant a higher mortality rate in the population as a whole, and the suddenness of the outbreak, after which many people who were previously in reasonable health died suddenly, leaving their next of kin unprepared and subject to higher-than-usual taxation due to a lack of inheritance tax planning.  

IHT is a voluntary tax

This is why planning is so important, with a tax charge of 40% the amount you can pay in tax cannot be ignored. Inheritance tax is usually described as a voluntary tax, with the super wealthy, who it was originally aimed at targeting, generally more likely to find ways to avoid paying it. And there are many ways you can do this or at least minimise the amount your loved ones may have to pay.

With the addition of the IHT freeze in play until 2028, it's more important than ever to seek professional advice to help navigate the threshold and high inheritance tax penalties. If you’re interested in how to minimise IHT on your estate, to ensure more of your hard earned wealth is passed down to your loved ones, we can help. Give us a call on 0333 323 9065 or book a free non-committal initial consultation with a member of our team to find out more.

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Please note: The Financial Conduct Authority (FCA) does not regulate tax advice or estate planning.