Experts react to latest inheritance tax receipts rise to £1.1bn

Industry experts have reacted to the UK's latest inheritance tax receipts, which rose by £100m compared to the same period last year to £1.1 billion, according to latest HMRC data.

These tax receipts are continuing to trend higher than previous years reaching £564m in May 2022.

Darran Harrison, Wealth Planner at Kingswood, said: "The continued increases in IHT receipts can be aligned with many factors. These range from rising asset prices and the economic recovering, meaning the values of estates of wealthy individuals is rising.  And of course, not forgetting the increase in deaths from Covid 19 will have no doubt have played a part by increasing the number of people who have sadly died in the last 2 years. 

"The increase also shows the effects of ‘fiscal drag', where allowances and reliefs have not increased in line with rising prices. With inflation continuing to rise, this factor will play a big role in future tax revenues. The nil rate band and residence nil rate band are set to be frozen until at least April 2026, resulting in many families receiving increased IHT bills as more estates are brought into scope. 

"With the impact of freezing tax bands and allowances the Chancellor is increasing tax receipts without changing tax rates. The effect is magnified in periods of high inflation, resulting in the buying power of a family being significantly reduced over time.

"This tax year, you can pass on £175,000 of your property tax-free, which is effectively doubled to £350,000 when combined with the allowance of your spouse or civil partner. That's layered on top of your inheritance tax allowance - or nil rate band - of £325,000, meaning it is possible to pass on £1m inheritance free as a couple. Any above this is taxed at 40%."

Andrew Tully, technical director at Canada Life said: "With tax thresholds frozen we will see more unsuspecting families drawn into paying IHT which has already doubled its tax take over the last 10 years.

"This surge will partly be driven by the ongoing increase in house prices, as residential property makes up the largest share of most estates. There has also been a higher volume of wealth transfers due to Covid - partly due to more deaths in the elderly population, but also as some people make outright gifts to help family during this difficult period.

"Both the nil rate band and residence nil rate band are frozen until at least April 2026 so we can expect to see IHT receipts continue to rise. 

"The legacy from the pandemic may mean more people are open to discussing estate planning with family. Good planning can help to reduce or mitigate IHT so it's essential to get expert financial advice for tax efficient ways to pass wealth onto loved ones."

Stephen Lowe, group communications director at retirement specialist Just Group, said it was vital people took steps to understand the size of their estate and the tax rules. 

"While only a small proportion of people pay inheritance tax, the amount being paid has more than doubled in a decade from under £3bn to more than £6bn in 2021/22.

"One reason is that the Nil Rate Band - the size of the estate that can be left without paying any IHT - has been frozen at £325,000 since 2009. If it had risen with the general rise in prices, it would be more than £100,000 higher today.

"The monthly receipts data also shows that the phased introduction of the Residential Nil Rate Band between 2017/18 and 2020/21, an additional tax-free threshold for those leaving homes to children, has not stopped the continued rise in the amount of IHT being raised.

"Typically, the value of a residential property is the main reason why estates are pushed over the IHT thresholds and the recent house price boom across the UK means many people could be approaching or surpassing the threshold without realising. However, there are options available such as lifetime mortgages that can help people pass on that wealth while still alive to see the positive effect it can have on loved ones.

"Professional, regulated advice can help people across the UK work out how their property may impact their estate planning and consider how the wealth tied up in bricks and mortar can help people meet their goals in later life, whether to use that wealth to boost consumption in retirement or to bequeath it in a tax-efficient manner."

Rachael Griffin, tax and financial planning expert at Quilter said: "While HMRC should be applauded for ensuring that 94.9% of all taxes were collected successfully there are still clear issues with the system that remain unaddressed. Simple errors accounted for nearly £3bn of the tax gap equating to 9% of the total.

"In addition, the biggest contributor to the tax gap was ‘failure to take reasonable care' making up a huge £6.1bn of the tax gap equating to 19% of the total. Both reasons for failing to pay tax point to a complicated system that people clearly struggle with and is costing the government billions each year.

"The stability of the tax gap over the last few years also points to there needing to be a radical change if we are going to ensure that the public coffers are refilled particularly after they have been so heavily drained due to Covid. The tax gap for the 2010/11 tax year was 6.7% so in a decade we have only improved by a paltry 1.6%. There are clearly holes in our tax system the government have so far not found the means to plug.

"The government should really be ploughing their efforts into reducing the tax gap rather than raising taxes themselves. For example, if the current 5% tax gap could be reduced by around 2 percentage points then the rise in national insurance contributions could be counteracted as this would raise roughly £13bn.

"The IFS calculates that NICs bills in 2022-23 are forecast to raise £10.9 billion in revenue, with the revenue from the increase in NICs rates from April forecast to raise substantially more (£17.2 billion) than the reduction in revenue from the increases in thresholds from July (£6.3 billion).

"New schemes such as Making Tax Digital should help to streamline the process and make sure that people pay the tax they owe and avoid unintended errors. However there are ever-growing challenges, not least with the growing popularity of crypto assets, where HMRC's ability to gather information is likely still at an early stage.

"Making sure all members of society pay tax is an essential part of our system. Fixing the nations taxation system is going to become increasingly important in the wake of the pandemic and during the current tough financial times we are living through. For those worried that they are going to make mistakes when filing their tax returns, seeking professional financial advice can help alleviate the worry and make sure that you are paying exactly the amount they owe."