Inheritance tax rise in budget? New Treasury figures illustrate it’s already rising by stealth
Inheritance tax receipts shot up by £400m between April and September compared with the same period last year, new government figures show.
This meant a record haul for the Treasury of £4.3bn.
One of the main reasons is that, while everything else has been going up due to inflation, the threshold at which people start paying inheritance tax has been frozen.
There’s speculation the tax could be hiked in the budget next Wednesday – but the government figures show it is already effectively going up every year.
Jonathan Halberda, specialist financial adviser at Wesleyan Financial Services, said: “As we’ve already seen in the higher IHT receipts today, the government could simply leave the current £325,000 threshold unchanged and IHT would continue to generate more cash for front-line services.”
How inheritance tax currently works
There is no tax if your estate’s value is below the £325,000 threshold or you leave your estate to your spouse or civil partner, or an exempt charity or group.
The tax is currently charged at 40% – but only on the part of the estate that lies above the threshold. For example, if someone’s estate is worth £400,000 when they die, then £75,000 of that estate would be taxed at 40% (£30,000 total tax).
Bear in mind that if you are married or in a civil partnership, any allowance you don’t use can be added to your partner’s allowance when they die.
This means a couple can pass on as much as £1m without their estate being subject to inheritance tax.
There are several exemptions, including on agricultural land and family businesses, as well as pension pots.
Read about all the intricacies here…
How could it change?
People, for example parents, can gift someone large sums and, as long as they don’t die within seven years, it won’t incur any inheritance tax.
“If the pre-budget rumour mill is to be believed, the chancellor is contemplating extending the length of time you have to wait for gifted assets to be exempt from IHT from the current seven years, perhaps to 10 years,” said Mr Halberda.
Another option would be increasing the tax rate – or the value people have to pay inheritance from could be lowered.
There are several exemptions, including on agricultural land and family businesses – these could potentially be lifted.
Charlene Young, AJ Bell pensions and savings expert, said: “The chancellor might look in the round at IHT and decide to tweak and reform reliefs and use of trusts, which tend to be tools used by wealthier households. This could potentially be framed as a tax on the wealthiest, sparing the middle classes. Although clearly that depends on your perspective.”
What would thresholds be if they hadn’t been frozen?
Ms Young said: “Had both bands been uprated with inflation rather than being frozen in 2020, a couple could pass on an estate worth nearer £1.5m today.”
How many people does it currently impact?
Ms Young said: “Although IHT is widely disliked, it’s worth pointing out that the tax is paid by very few households. Only a tiny fraction of families ever have to pay any IHT at all due to the reliefs available that mean a homeowning couple can normally pass on £1m before IHT kicks in.
“And for those with larger estates, there are various strategies available to allow people to give money away and pass on assets tax efficiently.”