Inheritance Tax ‘more profitable’ for Sunak as receipts soar – ‘Future changes’ may loom

Inheritance Tax is a levy which is charged on the value of an estate above a particular threshold of a person who has passed away – usually set at £325,000. Understandably, there is a certain level of aversion to IHT, with some viewing it as a “death tax” while others argue it is restrictive of income and gifting before death. Regardless of views on the levy, it appears to be here to stay, and this has only been further evidenced by the rise in Inheritance Tax collections recently.

Data has shown a near 26 percent year-on-year increase in Inheritance Tax receipts, showing the continual uptick in IHT takings for HMRC. This is as concerns rise that the Treasury could increase its tax take even more by making changes to the levy. 

Shaun Moore, tax and financial planning expert at Quilter, provided insight, and said: “Figures released today show Inheritance Tax receipts are becoming more profitable for the Treasury at a time when the Chancellor needs additional funds to pay for the pandemic’s economic support schemes. 

“The Government collected £2.7billion in Inheritance Tax between April and August, which is £0.7billion – 35 percent – more than for the same period a year earlier.

“In March, Rishi Sunak announced that both the nil rate band and residence nil rate would remain frozen at existing levels until April 2026, at £325,000 and £175,000 respectively, meaning many families are already receiving increased IHT bills due to rising property and share prices.

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“The best way to beat the big IHT freeze on allowances is to consider intergenerational wealth planning options such as making regular gifts; investing tax-efficiently or considering the use of trust planning, all of which a professional financial planner can help with to potentially eliminate any tax bill.

“While this is decent uplift for the Chancellor, it is really small beer when compared to other forms of tax, which is why the Chancellor may well be looking elsewhere to raise some serious cash in his Budget come the autumn.”

In April and May 2021, lower receipts in Inheritance Tax were recorded by the Government. However, this was attributed to a temporary issue.

It involved the fact HMRC was unable to accept cheques for payment of IHT due to COVID-19, which was later resolved. This resulted in a peak in receipts for June 2020.

Higher receipts were recorded in October and November 2020, and are expected in March to August 2021. This is due to higher numbers of wealth transfers which took place during the pandemic.

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However, this cannot be fully confirmed and verified until HMRC receives full administrative data on the situation.

Also commenting on the matter was Nick Cousins, founder and CEO of probate platform, who said the recent rise was not surprising, adding: “IHT calculations are hugely influenced by the value of assets in an estate. Property is usually a significant part of the estate and house prices in the UK have continued to rise, fuelled in part by the stamp duty holiday and technology allowing people to rethink where they live and work. 

“Other investments (stocks, funds) have also rebounded following the initial impact of the pandemic. Secondly, the tragedy of Covid is the increased number of deaths in the UK, many of which were sudden or unexpected. Families may not have had time to plan how they would manage their assets to minimise tax liabilities upon death.”

But for Laura Tommis, Trust Manager at ZEDRA, the Chancellor may well look into Inheritance Tax further in his upcoming Budget as plans for the future are made.

She added: “As the Government needs to further increase tax receipts, there may also be future changes to some of the current IHT exemptions and allowances, such as Business Property Relief, which could mean it is best to look at planning opportunities utilising reliefs available now rather than delaying matters.”

One way of reducing Inheritance Tax is often posited as giving gifts. However, this must be at least seven years before a person dies to avoid taper tax. 

If a person dies within seven years of giving a gift, and there is IHT to pay, then the amount of tax due depends on when the person gave it.

Gifts given in the three years before death are taxed at 40 percent, decreasing to 32 percent if the gift is given three to four years before, and 24 percent for four to five years before.

For a gift given five to six years before death the rate is 16 percent, and decreases again to eight percent between six and seven years, before it is eliminated at seven years or more. 

Britons are often encouraged to seek financial advice to plan their estate if they wish to mediate Inheritance Tax payments in the best way possible.

Stephen Moses, managing director of digital estate planning firm, Zenplans, concluded: “While we may well have expected an increase, 35 percent is significant, and should drive home the importance of taking sound professional advice, as proper planning today could really pay off.

“These latest figures should act as a bit of a wakeup call that people need to be proactive and have those planning conversations sooner rather than later.”

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