IHT receipts approach record year – will the tax be reformed?

The Treasury has moved closer to a record-breaking year for inheritance tax (IHT) receipts after the latest data shows estates paid £6.3 billion to HM Revenue and Customs between April 2023 and January 2024.

The inheritance tax take is £400 million higher than the same period last year and will prompt further calls for reform of the controversial charge.

The annual increase of 6.8% means the Treasury is on course to take record IHT receipts of around £7.6billion in the 2023/24 tax year, according to analysis from Evelyn Partners.

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It comes after the tax-take surged to an all-time high of £7.1 billion in the 2022/2023 financial year, which was already a £1 billion annual increase.

Laura Hayward, tax partner at Evelyn Partners, suggests the frozen IHT threshold has pushed more estates into paying the levy as high house prices and asset valuations take people above the allowance due to the impact of fiscal drag.

 “With this process at work, it’s no surprise that IHT receipts continue to rise on an annual basis,” says Hayward.

“Although a relatively small number of large estates are typically behind the lion’s share of annual IHT revenues, this is being supplemented by thousands of more modest inheritances. 

“Rising house prices and growth in investment assets have boosted the value of estates over the years, and this is drawing more estates, and more assets in each liable estate, over the threshold at which IHT kicks in – because the nil-rate band has been frozen at £325,000 since April 2009.  

 “Minor property downturns such as we’ve seen in the last year or so will do little to dent this trend. And even though the Covid effect on mortality, which was at one point increasing the overall IHT take, must now have all-but played out, IHT receipts continue to rise.”

Calculations from Wealth Club suggest the average IHT bill could increase to £238,000 this tax year, with more than 30,000 families having to hand over part of their inheritance to the taxman. 

This is an 11.2% increase from the £214,000 average paid just three years ago and a 14.2% rise in the number of estates paying the tax.

Will IHT be cut in the Spring Budget?

There have been reports that IHT will be reformed or maybe even scrapped in the Spring Budget after changes failed to materialise in the Autumn Statement.

But analysts highlight that the rumour-mill has been silent in recent weeks.

“Whether it’s due to a plugging of leaks at the Treasury, or to a change of heart at No.10 and No.11, the Budget rumour mill has gone quiet on the subject of IHT,” adds Hayward.

“Despite being paid by a small proportion of estates, IHT is unpopular and has attracted attention as one of the taxes the chancellor could look to cut at the spring Budget, in a last roll of the fiscal dice before the election battle proper commences. “

Speculation before the Autumn Statement focused on a cut to the 40% rate but Hayward says raising of the nil-rate band from £325,000 would do more to protect families with more modest estates who are being drawn into paying IHT.

“Property and investments tend to rise in value over the long-term so if nothing is changed, more of households’ saved assets will surge above the nil-rate band - which would now stand at £489,700 had it risen with inflation since April 2009,” she says.

 “As an IHT cut would have little immediate impact on households’ financial situation, it’s perhaps more likely that a pledge on inheritance tax will feature in the Conservative manifesto rather than in the Budget – particularly as it might appeal to and motivate some of the party’s core voting demographic."

Rachael Griffin, tax and financial planning expert at Quilter, suggests the level of income that the Treasury receives from IHT means it is “likely to leave it well alone.”

“Though higher house prices and frozen thresholds have seen more people caught by the IHT net in recent years, ultimately, it impacts relatively few families but brings in a tidy sum to boost government coffers which it will be unwilling to relinquish – particularly if other tax cuts are on the table,” she says.

How to reduce your IHT bill

You don’t have to wait for government reforms to reduce your estate’s IHT liability.

Hayward suggests making use of gifting allowances before the end of the tax year.

She also suggests boosting your pension contributions as defined contribution pots fall outside of IHT.

Money left to your spouse or civil partner is automatically tax-free, so make sure this is reflected in your will.

Nicholas Hyett, investment manager at Wealth Club, also suggests investing in companies that qualify for Business Relief as these are typically inheritance tax free after two years, as well as investing in an alternative investment market shares through an ISA. 

“The greatest IHT threat probably comes from where you least expect it: your ISA,” he adds.

“While tax efficient in so many way, ISAs are not IHT free, so up to 40% of your long-term savings could end up with the taxman.

“An alternative is to invest in an AIM ISA, a managed portfolio of AIM shares that can be IHT free after two years.”