Figures recently released by the Office for National Statistics show that, for the first time ever, receipts from inheritance tax for the tax year ending April 2023 rose above an astonishing £7bn, and that’s a substantial increase over the figure of just over £6bn that was collected in the previous tax year. Indeed, that increasing trend looks set to continue as HMRC figures for the first quarter of this tax year show that receipts hit the £2bn mark, a 10% increase on the same three-month period last year.
It is not surprising that inheritance tax receipts are rising to levels never previously seen given the decision taken by the government to continue to freeze the threshold at which the tax becomes payable at £325,000 which has been the level since 2009. It is now set to remain at that figure until April 2028 at the least.
As the rules stand, an individual can pass up to £500,000 of assets to their relatives tax free which is the basic allowance of £325,000 plus an extra £175,000 that relates to property. When one half of a married couple dies, they are able to transfer their allowance to the survivor, making it possible to bequeath up to £1 million in assets before any tax becomes payable.
Assets that are left above those thresholds are then taxed at 40%. What makes things worse is that for many estates, the tax has to be paid before the full value of the estate has been determined and sometimes before even probate has been granted. Inheritance tax has to be paid at the latest at the end of the sixth month after death, and very few properties will have sold within that period. If it isn’t then the government charges interest at a whopping 7 ½% until the estate liability is settled in full.
Freezing the thresholds, which has been the policy of successive chancellors, is seen as an effective way to increase the tax take and raise cash without actually resorting to an increase in tax at all. This is because as asset values rise, principally related to property, more and more estates find that they fall into the tax trap. Rising interest rates, for those lucky enough to have substantial cash savings, are also contributing to the problem.
According to a report in The Daily Telegraph, forecasts produced by HMRC show that the decision to freeze the tax allowances will see over 49,000 estates fall into the tax trap over the 7 year period that would not have had to pay at all had the allowances increased in line with inflation.
And it’s interesting to see that Chanceleor, Jeremy Hunt, in his recent Autumn Statement, once again elected to not make changes to the current inheritance tax system, partly because of the forecasts for the increasing tax take and partly because any changes would be seen as a tax cut that only benefits the wealthy and for many that is considered a vote loser at a time when the Conservatives are likely to need every single vote they can muster.
But there are things that you can do to mitigate any potential liability
And the first thing for many people is to realise that they might have a potential problem and therefore look at doing something about it. This is because many people think, rightly or wrongly, that the tax won’t apply to their estates when they die. But if you are a home owner, ask yourself one simple question, and that is just how much is my house worth right now?
Then there is our reluctance, as a nation, to talk about our finances or death with our loved ones, both subjects that can be hard to raise and to discuss, but one that could prove to be very costly, at least to your beneficiaries anyway.
What can I do to reduce any liability?
Well, first of all you should make sure that your will is up to date and that it is worded in such a way as to ensure that you take advantage of any and all tax allowances that are available to you at the time it is drawn up.
You should take advice on whether the use of “trusts” will be beneficial to your financial situation and you should also consider gifting to your beneficiaries whilst you are still alive. You have an “annual exemption” which means that you can gift up to £3,000 a year tax free. This can be given to one person or split between several people and the person who receives the gift doesn’t have to be a relative.
You can also make tax free gifts to someone who is either getting married or entering into a civil partnership. You are allowed to gift up to £5,000 to a child, £2,500 to a grandchild or great-grandchild and up to £1,000 to any other person you choose each year.
There are other ways that you can plan to help avoid some potential liabilities. However,
inheritance tax is a complex subject and so if you think it may apply to you then you should seek appropriate legal advice to help plan your finances appropriately.
Of course this is not a problem that applies to all. Indeed, the Treasury’s own figures estimate that some 93% of estates do not pay death duties.
