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Inheritance tax: more and more families pay inheritance tax and the Treasury collects increasing sums
Grieving families handed over a record £7.5bn in inheritance tax to the Treasury last year, new official figures show.
This is a jump from £7.1bn in the previous financial year and marks the third consecutive annual record.
Booming house prices in recent decades, combined with frozen thresholds, are dragging more families into the inheritance tax net and the Government is collecting ever-larger sums as a result.
The Office for Budget Responsibility forecast last month that inheritance tax revenue will reach £9.7bn a year in 2028/29.
Despite rumors that the Government was planning to ease the burden of the controversial tax, it announced no changes to the Autumn Statement or Spring Budget, and the proposals are now expected to be revealed in its election manifesto.
Only the richest 4 per cent of families pay inheritance tax, which is 40 per cent on any assets above the £325,000 threshold, or £500,000 if you leave an estate to your direct descendants.
However, those who pay the tax may receive tens or hundreds of thousands of pounds.
The standard nil rate band for inheritance tax is £325,000, but home-owning couples can leave an additional £175,000 each of the property wealth of their main residence to their children and grandchildren. This creates a maximum total IHT-free amount of £1 million for a married couple with direct descendants.
The Institute for Fiscal Studies recently estimated that the number of estates subject to inheritance tax will rise to more than 7 per cent by 2032-33. Last week the IFS called for an inheritance tax raid on unspent pension funds and other loopholes, with the funds being used to reduce the overall tax rate.
If the Government decides to reduce inheritance tax, its main options are to cut the general rate, increase or reform the thresholds and change the rules on gifts.
> Ten ways to legally avoid inheritance tax
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How much is inheritance tax and who pays it?
It must be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, so your loved ones will have to pay inheritance duties.
This threshold is known as the “null type band.”
But there is another important allowance which increases the threshold to a joint £1m if you have a partner, own property and intend to leave money to your direct descendants.
This is called the “zero residency rate band.”
Once an estate reaches £2 million, this home ownership allowance begins to be phased out by £1 for every £2 above this threshold. It disappears completely at £2.3m.
If you are worth more than this, your beneficiaries will have to give the government 40 percent of your assets above those levels.
How could the Government reform the inheritance tax?
1. Raise the threshold: The £325,000 nil rate band has been frozen for many years and former Conservative chancellor George Osborne introduced the additional £175,000 per person margin for those leaving property to their direct descendants.
One option could be to ditch the complicated property rules and simply increase the nil rate band to £500,000, or £1 million for married couples, for everyone.
2. Cut the 40% rate: A reduction in the general rate or a new tiered system or sliding scale could be considered.
3. Abolish it outright: This is likely to be unaffordable and, given the financial difficulties, seen as too much help for the richest families, but the Conservatives could promise to move towards this goal in the long term.
4. Change the gifting rules: These are complicated as they are and the annual tax-free allowance of £3,000 has not changed since 1981. Inflation has been 270 per cent since then. The Government’s independent tax gurus suggested reforming the complicated inheritance tax gift rules four years ago, but no action was taken.
Have your assets valued if you could be responsible
Those who may have to pay inheritance tax should look into tax planning as soon as possible if they want to avoid having their loved ones pay it.
“The prospect of a general election looms large with these expected to take place in the second half of the year and tax cuts and the economy are likely to feature prominently in the coming months,” says Stephen Lowe, director of Just Group . .
‘We are already seeing a public debate about whether certain tax reliefs should be removed to make the ways in which wealth can be passed on between generations fairer, and we expect this to continue as we get closer to the election.
‘Even without any change to IHT, the OBR predicts the tax will continue to rise further for the Chancellor of the Exchequer, and we encourage people to check whether the tax may affect them.
‘A good way to start is to assess the total value of your estate, including an updated valuation of your property.
“Professional, regulated advice can help people estimate the total value of their estate, estimate how much tax they are likely to owe and understand what options they have to manage their potential tax liability.”
An increasing number of middle-income families now face high tax bills
“Despite considerable speculation that the government would attempt to enact inheritance tax reform over the last year, so far all has remained quiet on this front and this morning’s figures illustrate exactly why the Chancellor would have wanted to leave it as is ” says Rachael Griffin, tax and financial planning expert at Quilter.
‘This significant increase has reignited discussions about the fairness and structure of the IHT system, particularly as an increasing number of middle-income families now face hefty tax bills thanks to the government’s extended freeze on the IHT threshold.
‘Reducing the general inheritance tax rate from 40 per cent would certainly meet with the approval of core Conservative voters. More broadly, however, it would likely prove unpopular given that it would benefit the wealthy at a time when so many people across the country continue to struggle with the cost of living.
‘The zero residence rate band, while well-intentioned, is marked by its complexity and often excludes a significant demographic, particularly the growing number of childless older people.
“A more equitable and simplified inheritance tax system involving increasing the nil rate band to £500,000 would not only be fairer but would also better reflect the changing demographics and social structures of this country.”
Current rules penalize single people without children
“This month marks 15 years since the inheritance tax nil band was last increased,” says Alastair Black, head of savings policy at Abrdn.
‘This freeze, combined with rising asset values, means the tax is affecting more and more people than it was ever intended to target.
‘As well as addressing the scope of the tax, we should also take the opportunity to simplify it. One way to achieve this would be to eliminate the residency nil rate band and increase the standard nil rate band.
‘This would create a more agile regime and encourage more people to get involved in estate planning, helping wealth move more freely between generations, which in turn could bring significant benefits to the economy and those under financial pressure amid the current cost of living crisis. .
“It also would not further penalize those who do not have children and who are not married or in a civil union, creating a more equal tax system.”
Children and grandchildren in difficulty will pay the inheritance tax bill
“This record inheritance tax take for the Treasury is not surprising, given the deliberate freezing of tax-free relief since 2009,” says Laura Hayward, tax partner at Evelyn Partners.
‘The average UK house price has increased by approximately 82.7 per cent since then.
“With no end in sight to the freezing of nil rate bands, there will be an escalation in inheritance tax liabilities if the rules remain the same, particularly as there is a massive transfer of wealth in sight in the coming Two decades”.
‘Research shows that older generations have up to £2.6 trillion of capital tied up in their homes, which the next generation or the one after that will inherit.
‘It is not the so-called boomer generation, rich or not, that will pay the inheritance tax bill on their properties; It is your potentially struggling children and grandchildren who could be deprived of a large portion of your hard-earned family savings.
“Any future government tempted to fill the gaps in public finances by further increasing the inheritance tax burden will have to take into account the deep-seated aversion that most households have towards the imposition of inheritance tax.” .
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