Property Prices push Inheritance tax take beyond £5 billion

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

HM Revenue and Customs recently revealed that 2017/18 was a bumper year for inheritance tax (IHT) receipts, indeed it was record year in that respect. A whopping £5.2 Billion was paid by estates, up from £3 Billion just 5 years ago. An increase of just under 75%. However, in recent years we have seen the average IHT bill fall ever so slightly to £179,000 (2016/17) , which means that there are growing number of estates paying IHT. So what is causing this. Unsurprisingly there are several factors accounting for this rise. These include the nil rate band, the threshold at which people pay IHT, which has been frozen at £325,000 since 2009. However the majority of IHT receipts come from residential property. We have seen rising residential property prices, over 30% since 2009/10, with an ever growing number of estates containing property. Whilst there are other factors, if house prices continue to rise will we see IHT receipts continue to rise? The answer to that question is no, and this is because of the new IHT allowance that was introduced in 2017 that applies to estates that have residential property, where the property is being passed to direct descendants on death.

The new allowance is the Residence Nil Rate Band (RNRB), and for 2018/19 it gives individuals an additional £125,000 of allowance before IHT is payable. The RNRB is due to increase to £150,000 next year and then £175,000 in 2020/21, after which it will increase with inflation, along with the standard nil rate band. The RNRB can be passed on to a married or civil partner in the same way as the nil rate band, however the allowance is reduced for large estates, those over £2M, and completely lost on estates above £2.25M (2018/19). So perhaps we will see a fall in IHT receipts over the next few years, on the basis that the RNRB is claimed that is. Whilst on holiday this summer I was chatting to a fellow vacationer who was telling me about the numerous issues they had with her late mother’s solicitor. He had calculated the IHT on the estate without taking into account the RNRB. Fortunately they were more clued up than the solicitor, and they avoided paying HMRC £100,000 more tax than was due.

That solicitor may have more changes to get their head around in the near future as the Chancellor, Phillip Hammond, has ordered a review of the “particularly complex” IHT regime. The Office of Tax Simplification has been tasked with the review and is due to report back with its proposals before the Autumn Budget. Let’s hope they do a better job of simplifying the tax than they did with pension simplification back in 2006!

The thing about IHT is that it is an avoidable tax, or if not completely avoidable it is relatively easy to reduce IHT bills. The use of allowances, gifts, trusts, pensions, and cash flow planning can save families many thousands of Pounds. Normally it is best planned for in the early retirement years. Too often advice is sort much later in life, resulting in fewer planning options and limited tax saving opportunities. If you are concerned about inheritance tax please do not hesitate to contact me.

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26 Apr 2024

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