The government collected £1.9bn in inheritance tax receipts in the first four months of the tax year, as thousands are believed to be missing out on tax breaks because of the complexity involved.
Information provided to financial advice firm NFU Mutual under the Freedom of Information Act shows a mere 5,420 taxpaying estates successfully claimed for the Residence Nil Rate Band (RNRB) in the 2017/18 tax year.
Introduced in April last year, the residence nil rate band (RNRB) provides an additional tax break on the family home; the value of the tax break will rise further over the next two years.
The tax break is a way of allowing families to pass on their housing wealth. It applies when property is passed on to direct descendants.
Individuals are able to pass on assets worth up to £325,000 – the nil rate band – when they die, before they have to pay inheritance tax at 40%.
Since April there is an additional £100,000 nil-rate band when a residence is passed on death to a direct descendant, which is tax free.
This has risen in value to £125,000 this year, and will gradually increase to £175,000 by 2020/21. From then on, it will increase in line with consumer price index (CPI) inflation.
Together with the inheritance tax nil-rate band and the ability to transfer unused main residence nil-rate band to a surviving spouse or civil partner, this allowed the government to claim there will be an effective inheritance tax threshold of £1m in 2020/21.
More than 24,000 estates pay inheritance tax each year, according to the latest official figures for the HM Revenue & Customs (HMRC).
The number of people making use of the new allowance has increased, with 3,490 taxpaying estates already claiming the RNRB, but NFU Mutual warns that many are still not taking advantage of the tax break, pointing that many people are put off by the complexity of the rules around inheritance tax.
This week, Old Mutual Wealth set out proposed changes to the inheritance tax nil-rate band and residence nil-rate band (RNRB) laid out in an open letter to Chancellor Philip Hammond.
International Investment’s latest ezine, a special report devoted to the issues surrounding IHT, is available here.