Inheritance Tax receipts up £0.7 billion
The latest figures from HM Revenue and Customs (HMRC), show that inheritance tax receipts received by HMRC have increased by £700 million to £6.1bn in the period of April 2021 to March 2022. This marks a significant increase over the same period in the previous year and continues the upwards trend of inheritance tax receipts collected by HMRC over the past decade.
See our previous article on inheritance tax.
What is Inheritance Tax?
Inheritance tax (IHT) is a tax paid on any inherited assets from a deceased person’s estate, so essentially it’s a tax on your wealth on death, that is above the tax-free threshold - although it can also apply to some gifts made during your lifetime. . This can be any kind of asset, such as money, possessions or property.
However, inheritance tax only kicks in after those assets pass a certain threshold in value. Currently, for the tax year 2022/23, your estate will only pay tax if the value is greater than the £325,000 threshold. Anything below this threshold is tax-free and is known as the nil-rate band. There is also an additional main residence nil-rate band which, for the tax year 22/23 sits at £175,000. To qualify for the main residence nil-rate band, you must pass your property down to a direct lineal descendant. This means a married couple could pass down up to £1m (£325,000 + £175,000 = £500,000 per person).
If a person’s estate value exceeds £2 million, the residence nil-rate band 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 this additional main residence allowance.
Any value above the applicable nil-rate band threshold will typically be subject to inheritance tax at a rate of 40%, with other rates being charged at 20% for chargeable lifetime transfers (CLTs) and 36% for the residual estate where 10% or more of the net estate is left to a registered charity. It is important to note that in the case that everything above this threshold is left to a spouse, civil partner, or a charity, this taxation will not apply.
If eligible, it is the responsibility of the inheritors to pay this tax within six months of the end of the month in which the person died.
Why is Inheritance Tax on the rise?
Inheritance tax has been steadily rising since 2009, with a brief dip in 2019/20 due to the introduction of the residence nil-rate band. Property prices have continued to rise, added to the fact that the Chancellor announced a freeze on allowances in his Budget 2021, which included a freeze to the Inheritance tax threshold for five years, or until 2026. This has all had the knock-on effect of bringing the value of more properties above the £325,000 threshold, therefore making them eligible to be taxed.
The pandemic has also contributed to the unusually high inheritance tax figures. Due to the unprecedented amount of COVID-19 related deaths, it was only natural that HMRC would see an increased amount of inherited estates getting caught in the inheritance tax net.
Additionally, because of the suddenness of the outbreak, many people who had not even considered inheritance tax planning due to their age or previously good health, were left unprepared and subject to significant taxation due to lack of wealth planning.
If you are interested in learning how you can keep more of your wealth for your loved ones and less in the hands of the taxman, why not get in touch. 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.
Please note: the Financial Conduct Authority does not regulate tax advice.