New HMRC data out today shows that IHT receipts for April 2021 to February 2022 were £5.5 billion – £0.7 billion higher than the same period a year earlier. Below, an investment and retirement expert share their views.
Julia Rosenbloom, tax partner at Tilney Smith & Williamson, the leading wealth management and professional services which is re-branding to Evelyn Partners this summer, commented:
“IHT tax receipts are the gift that keeps on giving for the Treasury as they show yet another year-on-year rise. While the revenue will prove useful to the government to help pay for its ambitious spending programme, this latest update from HMRC should be a wake-up call for families to think carefully about their tax planning.
“The outlook for personal taxes for the coming years is far from certain. However, even without any changes to the way IHT is taxed, many people can still expect to see increased IHT bills given both the nil rate band and residence nil rate band have been frozen until at least April 2026. This is bringing more estates into scope, not least because of rising property values.
“Families should take professional advice and use their current tax allowances before any possible changes are introduced. By planning ahead, and considering investing tax-efficiently or making gifts to family members (which may become increasingly welcome given the increase in the cost of living), there are a number of areas where an IHT bill could be reduced or eliminated.
“One area that families may wish to consider is the “regular gifts out of income” IHT exemption. Where an individual has more income than they need to maintain their standard of living, and they make regular gifts to someone out of that excess income, the 7 year survival requirement does not apply; the gifts are just immediately exempt. With inflation and the rise in the cost of living, people should review any arrangements they have in this respect as they may have less excess income. If they are giving away more than their excess income, the gift is actually a PET and there could be an IHT charge in the event of death within 7 years. Plus, it can be an administrative nightmare for the executors as people rarely keep good records. Whilst the exemption is not widely known or understood, many people actually benefit from it without realising – for instance, grandparents paying school fees, funding a life assurance policy etc.”
Stephen Lowe, group communications director at retirement specialist Just Group, said strong rises in house prices – the average home is now worth more than £350,000 according to one measure released this week – were likely to push many estates over the Inheritance Tax threshold.
“IHT receipts rose in 2021, partly due to higher death rates during the pandemic but gains in house prices approaching 10% a year will also push more estates above the exempt thresholds.
“Across the country, IHT is paid on about one in 25 estates but the numbers of estates paying the tax is higher where home prices are higher, most obviously in London and the South East. Although property sales numbers have fallen overall, the number of properties selling for more than £500,000 has increased and now makes up 17% of all sales in England and Wales in 2021 compared to 11% just two years earlier.
“Property can be tricky when it comes to estate planning because it is providing a place to live and is often a sentimental as much as a financial asset. It is also illiquid in the sense you can’t trade or gift part of a property as easily as cash or other investments.
“Our recent FOI request (see table below) found that although the average value of estates liable for Inheritance Tax in 2018-19 doesn’t vary much by region, the components of those estates is very different. In areas such as London and the East of England property is a much bigger proportion of the estate and relatively low amounts of cash and securities are left compared to other areas which may require a very different approach to estate planning.
“Professional, regulated advice can help people across the UK work out how their property may impact their estate planning and consider how the wealth tied up in bricks and mortar can help people meet their goals in later life, whether that is to use that wealth to boost consumption in retirement or to bequeath it in a tax-efficient manner.”