Government quids in on back of fiscal drag policies
The 2022/23 tax year saw a record £7.1 billion IHT collected by HMRC, but looks set to be beaten this year as the OBR (Office for Budget Responsibility) has forecast IHT will raise £7.2 billion in 2023/24.
The rise in IHT receipts is as a result of an increasing number of households being brought within the thresholds that have been frozen by the government until 2028.
Last year, 27,000 estates paid IHT, a 17% increase compared to the previous year and is being driven by a buoyant housing market, despite the recent downturn.
OBR forecasts suggest IHT will raise as much as £8.4 billion by 2027/28.
An increasing burden
Laura Suter, head of personal finance at AJ Bell, said: “Successive governments have chosen to freeze the nil rate band, dragging more people into the death tax trap. Based on AJ Bell’s analysis, the policy of freezing IHT thresholds since 2010 could cost families an extra £170,000 in death duties.
“It is possible, however, that pressure on house prices could actually stifle the growth in IHT revenues in coming years. In a slow housing market, probate properties will still be put up for sale but may fetch less than families hoped for, meaning less for the taxman too.”
Only one in 25 estates pay IHT, but that will rise with thresholds remaining frozen. This will increasingly affect the moderately wealthy, said Suter, as those with larger estates are more likely to get professional help to minimise their bill.
“Higher interest rates might also be spurring more people to settle inheritance tax bills quicker,” Suter added. As the government charges penalises late payment of tax bills at 2.5% above base rate, this penalty can really add up.
“Based on a previous FOI by AJ Bell, we know that more than 1.4 million taxpayers were charged interest by HMRC for late payment of tax in the 2020-21 tax year,” added Suter.
“As the tax system has become more complicated, we’ve seen more people miss tax payments and incur fees and the rising interest rate will mean bigger penalties.”
Planning is essential
Stephen Lowe, group communications director at retirement specialist Just Group, commented: “These big numbers are good news for the Exchequer but a warning for the public, reminding them to assess the entire value of their estate including an up-to-date valuation of their property.
“Professional, regulated advice can also help people work out the total value of their estate, calculate how much tax they may be likely to owe and understand what options they have to manage that tax bill.”
The government has already suggested that it may abolish IHT as part of its manifesto for the next general election, but the question remains what would replace it. This has been suggested before by this government, but no plans have been and yet no plans are in place.
Julia Peake, tax and estate planning specialist at Canada Life, said: “This is why having conversations about estate planning and how you want your assets to be protected and passed on in the future needs to happen much earlier in the financial life cycle than it currently does.
“Simple steps families can take include having up-to-date wills in place, and using lifetime gifting and trusts. Seeking advice from a regulated financial adviser should be the first important step.”
Helen Thornley, technical officer at the Association of Taxation Technicians, agreed that the freezing of thresholds will see more people paying inheritance tax in the coming years, and that this will put more strain on both taxpayers and HMRC.
“The probate office is already struggling with the current case load of applications and will need more resources to deal with the projected increase in applications,” said Thornley, and that the increase in administration and complexity means more families will need to look for tax advice to ensure they are paying the right amount of tax.
“We believe the inheritance tax system could be simplified and have previously called for it to be restructured. For example, reworking the taper relief for gifts would provide greater benefits to taxpayers, as well as relieving pressure on HMRC.”
Chris Thorpe, technical officer at the Chartered Institute of Taxation, added: “As well as dragging a greater number of people paying IHT, frozen thresholds will mean more people paying who are beyond the presumed intentions of the tax.
“Instead of the few richest people in the country, it is now ‘ordinary’ people simply owning their own home who will be caught as, given the increase in house prices over the last 20 years, many more are finding themselves considerably above the nil rate band.”
Frozen IHT thresholds is a fiscal drag
The freezing of IHT thresholds is part of a broader strategy of fiscal drag pursued by the government, said Rachael Griffin, tax and financial planning expert at Quilter: “[The government] has frozen income tax thresholds, capital gains tax allowances, dividend allowances and the amount you can take tax-free from your pension to boost revenues.
“The latest figures show receipts from PAYE income tax and national insurance payments for April to July 2023 were £138.7 billion, which is up £8.3 billion compared to the same period a year earlier. Given the threshold for the additional rate of income tax has reduced from £150,000 to £125,140, we can expect further rises in coming months.”
