The Chancellor could look to hike up inheritance tax (IHT) rates, after receipts fell for the first time in a decade, at a time when the COVID-19 pandemic has prompted an explosion in public spending.
The Office for National Statistics (ONS) said this week that in 2017-18, 3.9% of all UK deaths (620,000) resulted in an IHT charge. That is a fall in this proportion since 2009-10, and is likely due to the introduction of an additional tax-free threshold in April 2017, known as the Residence Nil-Rate Band, the ONS said.
The figures – available here – show a 4% drop in IHT receipts received by HMRC between 2018-19 and 2019-20, where receipts stood at £5.2bn. Until 2007-08 receipts had been climbing steadily, mainly due to increases in asset valuations prior to the financial crisis. In the following years, this trend took a downward turn, despite the total net
capital value of estates remaining broadly unchanged between 2007-08 and 2009-10 at £62bn.
Gordon Andrews, a tax and financial planning expert at Quilter, said that while the fall in the IHT take-take would normally “be a cause for celebration for households wary of paying tax on their estate”, the UK is in a period where any tax receipts in decline could become a target for reform for the Chancellor, Rishi Sunak.
Andrews said: “The reduction is credited to the introduction of the Residence Nil-Rate Band, which has been a controversial and complicated policy since its introduction in 2017. While it has spared many estates from a tax change, it adds a layer of complexity to the system.
“And this is not the only complication within the system by a long way. One of the main issues with IHT is how difficult it is to navigate, causing deep concern for people, the majority of whom may not be impacted.
“The Office for Tax Simplification has made a number of proposals to remove complexity and we hope that any future reform of IHT makes it easier for the public to navigate, rather than layering on tricky new rules. Complex tinkering could cause the Chancellor and wider Government more stress than it’s worth, so any reforms should be carefully considered.”
“Digging deeper into the figures we see some other interesting trends. For instance the number of taxpaying trusts has dropped dramatically, a 71% decrease in just one tax year to 140. The Government credits this to the 2006 trust reforms to tackle tax avoidance. It is worrying that so many people have started to avoid trusts as, when used appropriately, they are an important tool for estate planning. They grant a degree of control and security that cannot be offered elsewhere. However, a bad reputation over the past number of years has meant that all trusts have been painted with the same negative brush.”