Inheritance tax receipts have been climbing since 2009. More recently the 2021-22 financial year saw a 14% rise. This was the biggest rise since the 2015-16 financial year.
There are two main reasons for soaring IHT receipts.
Sadly, the effects of COVID-19 are still being felt. The peaks in IHT revenue align with surges in deaths due to the virus in 2020 and 2021. But the virus hasn’t gone away entirely and is sadly still taking lives.
But COVID-19 isn’t solely to blame. The government’s decision to freeze IHT thresholds has meant more estates have slipped over the line and become liable.
Some refer to this as a ‘stealth’ tax because more people will fall into it without realising it due to the threshold freeze over the years.
What’s likely to be the biggest driving factor is property prices. As prices increase, which they have done in recent years, property, which forms part of an estate, could mean the estate becomes liable to more tax.
What is the residence nil rate band (RNRB)?
You can pass on £325,000 without triggering an IHT bill (your ‘nil rate band’). But if you leave your primary residence to a direct descendant, the RNRB lets you pass on up to an additional £175,000.
The most recent figures from the house price index tell us the average house price in the UK was £286,000 in April 2023. At that value, a single person passing on a property would leave their beneficiaries liable to pay £44,400 in IHT on that property – this is assuming the whole of their nil rate band is used up by other assets.
As the thresholds are frozen until 2028, we could see the amounts payable to HMRC increasing. In the 12 months to April 2023, house prices increased by 3.5%. If that rate stays the same, the average property next year could result in an IHT bill of £48,404.
Joint allowances for married couples and civil partners
Things are different if you’re married or in a civil partnership.
You’re able to pass on any unused allowance to your spouse after your death. So, if your allowances aren’t used on your death, then both can be transferred to your spouse to use on their death.
In the case of the residence nil rate band, up to £350,000 can be passed on free of IHT. While this is larger than the current average house price, it will still help a number of estates.
The residence nil rate band is reduced proportionately where an estate exceeds a threshold of £2,000,000 though. And it will be reduced to £0 if the estate is worth more than £2,350,000.
How to ‘pass it on’ tax efficiently
Passing on your wealth before you die in the form of gifts is one tax efficient way. But there are lots of rules when it comes to gifting.
Gifting to save inheritance tax – level up your plans
Passing on your property tax efficiently is another thing all together. The rules are very complex, and we recommend you speak with a financial adviser and a legal professional.
Explore our essential guide to IHT
There are also things you can do to find out if you might have to pay IHT on your estate, and make IHT tax planning easier.
This article isn’t personal advice. We suggest you take advice if you are at all unsure of your position. Tax rules change and any benefits depend on individual circumstances.
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