Inheritance tax (IHT) statistics have been released by HMRC which shows that there has been a slight drop in how many estates have had to pay the tax. Additionally, IHT receipts have dropped for the first time in a decade.
Specifically, the statistics revealed the following key points:
- In 2017-18, 3.9 percent of UK deaths resulted in an Inheritance Tax (IHT) charge, decreasing by 0.7 percentage points since 2016-17. This reverses the longer term increase in this proportion since 2009-10 and is likely due to the introduction of the Residence Nil-Rate Band (RNRB) tax-free threshold in April 2017.
- The introduction of the RNRB also means the total number of UK deaths that resulted in an IHT charge has fallen for the first time since 2009-10. In 2017-18 there were 24,200 such deaths, a decrease of 3,900 (14 percent) since 2016-17.
- Similarly, in 2019-20 IHT receipts decreased for the first time since 2009-10. HMRC received £5.2billion during 2019-20, a decrease of four percent (£223 million) on 2018-19. This is likely because of the effects of the RNRB’s introduction in 2017-18, as there is a delay between death (when the tax charge is created) and receipts (when HMRC receives the tax payment).
- In 2017-18, 20,200 estates used the RNRB threshold, and £3.1billion of chargeable estate value was sheltered from an IHT charge as a result.
- The combined value of agricultural and business property relief (APR, BPR) was £3.5billion in 2017-18. This was a rise of £1.4billion compared to 2016-17. The value of exempted transfers to qualifying charities also rose, from £1.8billion in 2016-17 to £2.8billion in 2017-18. Despite the increases compared to last year, these values are below the peak seen in 2014-15.
These results are (at least for affected families) positive overall but Gordon Andrews, a tax and financial planning expert at Quilter, cautioned that: “While this would normally be a cause for celebration for households wary of paying tax on their estate, we are in a period where any tax receipts in decline could become a target for reform for the Chancellor.”
“The reduction is credited to the introduction of the Residence Nil-Rate Band (RNRB), 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, and the majority of whom may not be impacted.”
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Gordon went on to highlight the recent announcement from the Office for Tax Simplification which revealed that they would be looking into ways to simplify the overall tax system.
He highlighted that the organisation “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.”
In diving deeper into the figures, Gordon also noted a worrying trend: “The number of taxpaying trusts has dropped dramatically, a 71 percent 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.”
Trusts can be used in some instances to shelter assets from IHT but the rules on this are very complex and professional guidance is usually needed to organise it properly.
The government have guidance on this and they detail that IHT will be due:
- when assets are transferred into a trust
- when a trust reaches a 10-year anniversary of when it was set up (there are 10-yearly Inheritance Tax charges)
- when assets are transferred out of a trust (known as ‘exit charges’) or the trust ends
- when someone dies and a trust is involved when sorting out their estate
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