Partner Rebecca Fisher delves into the details of Inheritance Tax (IHT) and its impact on individuals and estates, and analyses the key statistics and what they may foretell.
There is a lot of crystal ball gazing when it comes to what the future tax landscape will look like. An impending general election always whips up press interest in the topic of IHT. It has been nearly 15 years since an increase in the nil-rate band (which is the tax free sum before Inheritance Tax is charged). To put that in context – in 2009 when the current allowance of £325,000 was introduced, the average property price was £155,852 according to HM Land Registry data. It was £291,000 in August 2023 (ONS). That is an 87% increase. If the nil-rate band had risen in line with house prices, it would currently be £607,750!
I am not sure anyone (including Mystic Meg) can really know what the future holds. However, HMRC have released their statistics on IHT. It is worth digging a little deeper into these to give some insight into what the direction of travel may look like.
Just how much does IHT affect the population?
Is it really a tax on just the rich as is often quoted in newspapers? Here are some key takeaways from the IHT stats for 2020-21:
- 3.73% (27,000) of estates paid IHT
- women pay more IHT than men
- over 85s pay 57% of all IHT
- IHT raised £5.67bn
- the average IHT bill for estates over £10m was £4.01m but the majority of estates paying IHT were valued between £1-£1.5m. Their average tax bill was £161,000
IHT is still assessed on the few not the many. The extent to which IHT really gains any traction with the public, I think, is largely distorted.
The figures show that of the IHT tax take, 45% of the UK’s liability (55% of England’s liability) was represented by London and the South East regions. That said if the nil-rate band tracked house prices then there could be a combined nil-rate band and transferable nil-rate band of £1,215,500. That would take a big proportion of estates out of paying IHT altogether.
For those who love a statistic, here is key data from 2020-21:
- The total revenue raised by IHT was £5.76bn – a rise of £800m (16%) compared to the previous year. This is almost certainly connected to the increase in overall deaths in the UK – this rose from 612,000 in 2019-20 to 722,000 (18%).
- The value of spouse and civil partner exemption was £15.7bn which was an increase of 21% on the previous year – that amounted to a rise of £2.7bn. 24,000 estates were valued above the nil-rate band in 2020-21.
- The increase in the use of the Inheritance Tax reliefs, Agricultural Property Relief (APR) and Business Property Relief (BPR), is quite incredible – those reliefs accounted for £4.2bn. This is an increase of £1.4bn (51%) on the previous year. BPR has increased by £1.3bn and APR only £91m.
- Charitable exemption amounted to £1.8bn; an increase of £200m on the previous year.
- Of the estates that paid IHT, 81% of the tax paid was generated by estates valued at £1m or more. This only represented 4.3% of all estates requiring a Grant of Representation.
- Net estates valued at less than £1m generated £1.06bn of IHT which accounted for around 96% of estates requiring a Grant of Representation.
- The average amount of IHT paid by an estate was £214,000 compared to an average in London of £279,200.
- 2,380 estates paid IHT were valued at between £300,000-£400,000 which includes those estates that do not qualify for the transferable nil rate band (TNRB) or charitable exemption. The average tax bill was £13,800.
- Approximately 6,330 estates were valued between £1m-£1.5m and had an average tax bill of £161,000.
- 2,300 estates paid tax where they were valued between £1.5m and £2m – the average tax paid was £337,000.
- Estates between £7.5m-£10m and £10m plus accounted for only 272 estates but the average tax bill was £1.72m and £4.01m respectively.
- The value of the relief afforded by BPR was £3.2bn – used by 3,380 estates.
- APR amounted to IHT relief of £1.02bn claimed by 1,300 estates.
The figures for trusts are not as reliable because the IHT payments can relate to one trust but there may be multiple taxable events (for example multiple appointments out). What is clear is the increasing decline in the number of trusts and those that pay tax. There are fewer than 100 entry charges per year (unsurprisingly) and the total IHT payable from 10 year charges is around £80m.
The complexity of the IHT rules versus the tax revenue generated is quite stark (to put it in context, capital gains tax (CGT) is predicted to bring in three times more than IHT). It remains to be seen whether there are big changes on the horizon but one can’t help but think that BPR may find itself in the crosshairs. If in one year, the value of the relief afforded has increased by £1.4bn, that’s a significant amount of relief! It would be interesting to know how much of the BPR claimed is attributable to interests in trading businesses versus structured products and AIM listed holdings. The latter is almost certainly to be the prime motivator for any overhaul in relief.
There is also no mention of potentially exempt transfers. It remains a lottery (a seven year lottery to be precise) as to whether or not tax is paid on any outright lifetime gifts. The move to bring all reporting into the self-assessment regime is an attractive one for HMRC. You only need to see the changes regarding CGT on residential property. The statistics do not alight on possible ‘lost’ revenue from lifetime gifts. Many may remember the All Party Parliamentary Group for Inheritance and Intergenerational Fairness report in January 2020. This suggested one option of an immediate gift tax at 10%. I think one thing which is certain is that IHT will continue to occupy the headlines in the run up to the election.
Meanwhile I am off to polish the crystal ball to see what the budget and October 2024 may have in store….
Rebecca Fisher is in the private client team, working with both UK and international clients, including families, family businesses and entrepreneurs, trust companies and family offices. She regularly advises international clients on the inheritance tax and capital gains tax of property ownership in the UK, as well as advising individuals and family lawyers on the tax implications of separation and divorce.