Stealth inheritance tax rise sees Treasury rake in record £4.4bn as families quietly pulled into the net
The government has raised £4.4bn from inheritance tax (IHT) in the last six months as more families “quietly” move online, according to data from the Treasury.
The amount collected between April and September this year increased by 2.3 percent and is expected to be a record for the government.
The increase in treasury coffers is partly due to frozen thresholds that have remained in place for years; This means that more and more people are being dragged into the tax payable group.
Any estate valued at more than £325,000, which is a deceased person’s total asset ownership, is subject to tax above this limit. There are exemptions such as transfers of the main home to children or grandchildren (called the residence nil rate band, or RNRB), which provides an extra £175,000.
But the threshold has been frozen since 2009, and with the value of assets such as property, investments and even cash rising, more people who previously did not accumulate total property wealth above this value are now doing so.
As a result, more tax must be paid on death, with the standard IHT rate set at 40 per cent for values above the thresholds.
This process is known as financial drift; Similar to how many workers are moved into higher income tax brackets as wages rise, but the band thresholds remain frozen.
Ian Dyall, head of estate planning at asset managers Evelyn Partners, pointed out that this would be another record-breaking year of income through IHT for HMRC.
“The Treasury is on course for another record-breaking year of receipts from inheritance tax (IHT). As asset values rise year on year, financial drift is quietly drawing thousands more families into the IHT net,” he said.
Get a free partial share of up to £100.
Capital is at risk.
Terms and conditions apply.
ADVERTISING
Get a free partial share of up to £100.
Capital is at risk.
Terms and conditions apply.
ADVERTISING
Mr Dyall added that in the upcoming budget Rachel Reeves could be expected to make further changes that would affect IHT, such as reducing the ability for people to gift cash without paying more tax before they die.
“Possibilities include a restriction on gift-giving, such as replacing the current unlimited gift-giving rule under the seven-year exemption with a lifetime gift-giving cap, or extending the seven-year rule to ten or more years.
“A combination of unspent pension assets becoming subject to IHT, fears about potential restrictions on pension tax-free cash and speculation that gift-giving rules may be tightened has led some families to rush to withdraw and distribute pension money.”
Most experts recommend that you do not rush to withdraw pension lump sums before the Budget until financial advice has been received and you are confident about your likely needs for retirement.
Quilter tax and financial planning expert Rachael Griffin said overall figures from government borrowing showed the Treasury remained reliant on taxing the same people even more.
“Today’s HMRC data provides a telling picture of how much public finances and the government continue to weigh fiscal drag to support revenues,” Ms Griffin said.
“The direction of travel suggests this burden could increase further. There is speculation that the Government is considering changes to gift-giving rules. Combined with plans to include pensions in IHT from 2027, these measures risk turning a niche tax that once affected a small minority into one that covers an increasingly larger proportion of the population.”
It is estimated that people aged 55 and over in the UK own or hold more than £3 trillion in assets.
Uncertainty about what exactly will be announced in the budget has prompted a flurry of questions for financial planners about pensions, as well as businesses, home buying and more potential long-term wealth transfers.
The housing market didn’t experience its usual fall boom this year; some experts suggest this is also due to Budget uncertainty, leaving buyers in wait-and-see mode before spending.
Stephen Lowe, director of pension specialists Just Group, added: “The Treasury now looks set to deliver its fifth consecutive record annual return. “With further reforms announced in last autumn’s Budget and yet to be implemented, we can expect this trend to continue and grow.
“Anyone who is unsure or concerned that their estate may be subject to inheritance tax should have an up-to-date valuation of their estate, including a recent assessment of the estate’s wealth. Estate planning is complex and difficult – especially with adjusting the rules – and many families who want to manage their estate effectively will benefit from professional financial advice.”
