Two financial experts explore the latest UK inheritance tax statistics which show receipts up by 4% to £5.4bn for 2021 while inevitably raising the prospect of whether the nil rate band or the 40% will be upped to help pay off the massive borrowing to tackle Covid-19.
Richard Bull, private clients partner at Crowe highlighted how the headline fall in IHT receipts in 2019/20 has now reversed: "This is interesting as the previous drop in 19/20 from 18/19 was attributed to the incremental increase in the residential nil rate band, going from £125,000 to £150,000. Despite increasing by a further £25,000 in 2020/21 to £175,000, IHT receipts still increased showing that asset growth outstripped the extra benefit of the allowance by some margin.
IHT is often looked at as a tax for the government to change in order to increase tax revenues to pay down covid borrowings. The tax remains very emotive for the majority of people and the detailed statistics released today show that in 2018/19 there were fewer estates paying IHT but the total paid by those estates increased. In 2018/19 22,100 estates paid IHT, down 9% (2,100) on the previous year."
Bull added that when considering changes, attention is often focussed on the various reliefs available and whether they deliver the results intended.
"Spouse exemption is a valuable relief as it allows one spouse to leave their wealth to a surviving spouse free of IHT. In 2018/19 wealth totalling £13.8 billion was sheltered from a 40% tax charge by the exemption.
Whilst this has been a cornerstone of the UK's IHT regime for a long time, limiting the allowance would be one easy way of increasing tax receipts but would not be popular with the electorate. Given that marriage rates are falling will this relief continue to be as popular and is it right to offer such an advantage to married couples when societal norms are evolving?"
He also pointed to Business Relief and Agricultural Property Relief (reliefs that shelter certain business assets and assets used for agricultural purposes) was claimed on assets totalling £3.49 billion - a small decrease on the previous year.
"Despite there only being a small shift in the total, the amount of APR claimed fell by £354m whereas BR increased by £310m. Within the total for BR, £1.7 billion related to unquoted shares, including shares listed on AIM. Alterations here could increase the IHT take by circa 10% but a total withdrawal of the relief would hit family owned businesses the hardest given the lack of liquidity usually inherent with such shareholdings", he said.
Digging deeper into the published stats Bull further said it reveals some interesting trends: "Estates up to £1m in value make up 96% of estates filing IHT accounts but only account for just under 20% of the total tax paid. The value within these estates totalled £71.2 billion with almost 60% being attributable to UK residential property. With the recent growth in property prices over the last few years that is still continuing now, UK residential property is likely to continue to fuel an increase in future IHT receipts.
Whilst people are able to make gifts of cash or other assets, unless people choose to downsize, getting rid of the family home is often too big a hurdle for many people. As asset growth continues whilst tax allowances are largely frozen, more and more families will be finding themselves forced to finance an IHT liability in the future."
While Mike Hodges, partner and head of the Private Wealth team at Saffery Champness, said: "Inheritance tax revenue has remained relatively steady during what was a very tumultuous time for the UK economy, when many other sources of Government tax revenue were adversely affected. Since IHT is often paid between 6 to 12 months after death, the impact on tax receipts as a result of deaths during the pandemic is unlikely to have impacted these IHT figures.
"While the Treasury may be pleased to see inheritance tax revenue growing once again, following last year's slight downturn, a four per cent increase in the current climate is not likely to placate the many commentators who believe inheritance tax to be ripe for reform - particularly following the reviews of the system by the Office for Tax Simplification and the All-Party Parliamentary Group.
"Furthermore, while the statistics may paint an overall picture of business as usual for IHT, look underneath the bonnet and there are certain figures which may point to prospective areas of future reform.
For example, there was a sharp decline in the value of inheritance-tax-exempt charitable transfers in 2018-19, an almost 40% decrease from the previous financial year. Given that charities have recently been under significant financial strain during the pandemic, with their usual fundraising activities restricted by social distancing rules, the need for private legacy donations is arguably greater than ever.
Former Chancellor George Osborne set out the goal of normalising legacy donations through IHT reliefs, but there remain question marks around just how effective this has been in practice and whether philanthropic activity is or could be better supported through other means, such as through lifetime giving and gift aid."
He added: "Pressure to reform the inheritance tax system is not only driven by the need to shore up the public finances, but also by the belief that IHT can be an effective tool to combat certain social problems - such as wealth inequality, as was argued earlier this year by the OECD in its inheritance tax report.
With the number of estates paying UK inheritance tax falling yet again to 3.7%, the fact is that while IHT remains a deeply unpopular and divisive tax it affects a small proportion of the population, thanks to factors such as the increased band to cover a couple's main residence up to a £1m. It is likely that the cries for reform will continue to grow louder amid the ongoing debate around wealth distribution and equality which has been exacerbated by the pandemic."
