Inheritance tax made the Government £4.3bn between April and September this year, new figures show, with experts saying the high take shows why it will be in the “spotlight” at next week’s Budget.
The tax, which is paid when estates are passed on after someone dies, brought in £400m more than it did in the same period last year (just over 10 per cent more). The figures from HMRC were released on Tuesday,
The vast majority of people do not pay inheritance tax (IHT) at all – because it is only applied to estates worth over a certain threshold – but it’s still unpopular among voters, with 24 per cent of adults thinking it is “very unfair”, according to YouGov’s most recent poll.
But there are rumours that Rachel Reeves may make changes to the tax at the upcoming Budget.
Experts think that the large amount the tax is raising demonstrates why the Chancellor will have it in her sights, given she is trying to plug what she has termed a £22bn black hole in the public finances.
Laura Hayward, tax partner at professional services and wealth management firm Evelyn Partners, said: ‘The steady annual rise in IHT receipts has been ingrained in recent years as inflation has dragged more assets and more estates over the frozen nil-rate bands.
“Any changes aimed at increasing the IHT take beyond this fiscal drag effect are likely to reap outsize results over the coming years as the baby boomer generation reaches average mortality.
“So it’s no surprise IHT is at the centre of Budget speculation again, with firm reports claiming business and agricultural property reliefs will be reformed and the gifting rules revamped.”
Nicholas Hyett, investment manager at Wealth Club, said: “Inheritance tax is an absolute cash cow for His Majesty’s Revenue and Customs, which is why it remains in the spotlight ahead of next weeks’ autumn Budget. No one knows what changes will be announced, but most agree there will be some attempt to milk more revenue from estates.”
What changes could Reeves make to IHT?
There are multiple changes to IHT that the Government could make.
One mooted suggestion is a reduction to the nil-rate band – the amount up to which an estate has no IHT to pay.
There is normally no IHT to pay on the first £325,000 of your estate. On top of this, homeowners can use the residence nil-rate band (RNRB) to shield an extra £175,000 from tax. It means individuals can pass on a total of £500,000 without paying IHT. Couples can share their allowances, so with these pooled, couples end up being able to pass on a maximum of £1m tax-free.
Another option is to tighten up the IHT gifting rules, specifically the seven-year rule which means no tax is due on any gifts you give if you live for seven years after giving them – unless the gift is part of a trust.
Changes to business and agricultural relief are also possible. Business relief reduces the value of a firm or its assets by either 50 per cent or 100 per cent when working out how much IHT has to be paid.
Additionally, farming businesses benefit from agricultural property relief, allowing landowners to pass down farms to their children with either 50 or 100 per cent relief.
How does IHT work?
Who pays inheritance tax?
Inheritance tax is paid on the estate of someone who has died, with funds from the estate used to pay HM Revenue and Customs (HMRC). This is done by the person dealing with the estate.
Crucially, there’s normally no tax to pay as long as the value of the estate is below £325,000, or ir everything over this threshold is left to a spouse, civil partner, a charity or a community amateur sports club.
And if you give away your home (your “main residence) to your children and grandchildren – including adopted, fostered and stepchildren) – your threshold can increase to £500,000.
On top of this, if you’re married or in a civil partnership and your estate is worth less than your threshold, the unused portion can be added to your partner’s threshold when you die – meaning they can end up having a threshold of up to £1m.
How much is inheritance tax?
The standard inheritance tax rate is 40 per cent and this is charged on the part of your estate that sits above the threshold.
This means that if your threshold is £325,000 and your estate is worth £400,000, you only pay 40 per cent on £75,000.
The estate can pay at a reduced rate of 36 per cent on some assets if it leaves 10 per cent or more of the “net value” to charity.
There are additional rules too. For example, the £175,000 extra allowance for your home only applies if the estate is worth less than £2m. On estates worth more than this, the allowance will decrease by £1 for every £2 above £2m that the estate is worth.
And there are additional exemptions. For example, no tax is due on any gifts you give if you live for seven years after giving them – unless the gift is part of a trust.
You can also give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate, even if you do die within seven years.
There is a full list of rules and exemptions in our guide on how to avoid the tax trap.
