Inheritance tax take running 14% higher than 2021: Families warned to act on Hunt’s five-year IHT allowance freeze

by | Nov 22, 2022

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Five days after the Chancellor of the Exchequer extended the freeze on inheritance tax nil-rate bands until the 2027/28 tax year, data published by HM Revenue and Customs today showed another annual increase in IHT revenues for the Treasury. 

HMRC said that IHT receipts for April 2022 to October 2022 are £4.1billion, which is £0.5billion higher than in the same period a year earlier – an increase of 14%.   

Julia Rosenbloom, tax partner at Evelyn Partners, the leading wealth management and professional services group, comments: 

‘Coming fast on the heels of Jeremy Hunt’s Autumn Statement, if anyone needed a reminder of the stealthy growth of inheritance tax, it’s here in the form of fresh data showing rising receipts from death duties. The latest 14% annual rise in IHT revenues for the Treasury shows how effective the allowances freeze – which has been in place since 2009 in the case of the main £325,000 nil-rate band – already is in drawing more assets into the IHT net. 

‘This process will in all probability continue apace up to 2028 as fiscal drag does its work under the radar. Even with a moderation in property and investment asset prices, estates that come to probate will be sitting on years or decades of growth, thanks in large part to the hard work and prudence of the post-war generations. The Office for Budget Responsibility expects IHT receipts to soar from £6.1billion in the 2021/22 tax year to £7.8billion in 2027/28 – an increase of 28%. 

‘IHT has been described as a “voluntary” tax in some senses, as giving away assets during lifetime is a very effective way of reducing or wiping out IHT liability. But large gifts remain part of the estate for seven years, assets must be handed over “without strings”, and most savers prefer to retain access to their assets in case they are needed as they grow older. Smaller gifts can be made that leave the estate immediately but the limits are restrictive and are subject to the same shrinkage in real terms in the face of inflation as the nil-rate band. 

‘Another restriction is that not everyone can use the residential nil-rate band as it applies only when a property is left to a direct descendant and where the individual’s estate is worth less than £2 million. With all this in mind, good planning is essential in order to prevent the Treasury being a major beneficiary of an estate:  

·        Relatively straightforward steps are to make a will to ensure one’s assets are distributed both as desired and without an unnecessary IHT liability, and to make good use of allowances. In most cases, you can pass on assets of unlimited value to a spouse or civil partner without any IHT liability. The transferrable nil-rate band means that when you pass away, your surviving spouse will inherit any of your unused IHT allowance, potentially allowing them later to pass on up to £650,000 tax-free – an amount that can grow to £1million if a married couple leaves their home to their children or grandchildren on second death (provided the estate is worth less than £2 million). 

·        Putting life assurance policies in trust is another good idea that is more straightforward than it sounds. 

·        Money purchase pensions are a very useful estate planning tool. If you die before 75, whether you have touched the pension or not, you can pass on a pension pot free of IHT and income tax for the beneficiaries. If you die after, it is still IHT free but the recipient will pay income tax as they draw down on the pension. So preserving a pension pot can be an effective IHT-reducing tactic, while also keeping savings accessible during lifetime. 

·        Investing in assets that qualify for Business Property Relief. These investments can provide inheritance tax savings in two years rather than the normal seven years. This exemption was originally aimed at small business owners, but also includes qualifying shares in unquoted trading companies, such as those listed on AIM, which can be purchased in ISAs. Companies that qualify for this relief, including those listed on AIM, tend to be smaller firms, and their share prices are often volatile and illiquid.  

·        Charitable giving: One way to reduce the amount that HMRC takes from an estate in inheritance tax is to make a donation to charity. The donation is taken off your estate before inheritance tax is calculated, and if the donation is large enough – at least 10% of your net estate – the rate at which inheritance tax is levied on the remainder of the estate is reduced. 

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