HMRC’s latest statistics show that inheritance tax receipts increased by 12% between 2021/22 and 2022/23. ICAEW’s Tax Faculty considers the impact of frozen thresholds and exemptions and the possible effects of the government’s IHT reforms.
When it comes to press attention, inheritance tax (IHT) punches above its weight. Although it’s currently paid on fewer than 5% of estates, it continues to hog the headlines. It would appear that the tax people are least likely to pay is the one they fear most. However, statistics published recently show that IHT receipts are growing and that more estates are coming within its scope.
Frozen tax thresholds have been a key factor in the recent increase in IHT liabilities. The amount above which an estate must pay IHT (the nil-rate band) has been frozen at £325,000 since April 2009. The legislation provides a mechanism for the nil-rate band to increase in line with inflation each year but successive governments have chosen to override it. ICAEW estimates that the nil-rate band would currently be more than £200,000 higher, at £526,000, had it been allowed to rise in line with inflation.
Other important thresholds and allowances have also been frozen for some time. The additional nil-rate band has been frozen at £175,000 since April 2020, the annual exemption at £3,000 since the early 1980s and the exemptions for gifts on marriage/civil partnership, as set out below, have not increased since the introduction of capital transfer tax (a precursor of IHT) for deaths on or after 13 March 1975.
To put this into perspective, a couple receiving an IHT-exempt gift of £5,000 50 years ago could have used the funds to put themselves on the housing ladder. According to Nationwide, the average house price in June 1975 was £10,728, meaning that £5,000 would have been enough to fund a 46% deposit for the average buyer. Fifty years on, the average house price is £272,751 and any couples looking for a deposit to buy a home will still have a lot of saving to do.
|
IHT exemptions for gifts on marriage/civil partnership |
|
| Gift from | |
|
Parent of party to the marriage/civil partnership |
£5,000 |
|
Remote ancestor of party to the marriage/civil partnership |
£2,500 |
|
Party to the marriage/civil partnership |
£2,500 |
|
Any other person |
£1,000 |
The recent figures also highlight the importance of agricultural property relief (APR) and business property relief (BPR) to estates. Claims for APR and BPR totalled £5.28bn for 2022/23, an increase of £0.86bn (19%) on 2021/22. However, these figures may not be a perfect reflection of the cost. Where 100% relief is available, the need for accurate valuations is less important.
At the Autumn Budget 2024, the government announced significant changes to APR and BPR, including introducing a cap of £1m on the amount attracting relief at 100% from April 2026. Other measures announced by the government include bringing most unused pension funds and death benefits within the value of the person’s estate from April 2027.
Taking account of these measures, the Office for Budget Responsibility estimates that IHT receipts will be £14.3bn for 2029/30 an increase of £7.6bn (113%) on 2022/23.
However, in a sign that a thaw may be coming, the government recently announced that the new £1m allowance for APR/BPR will be adjusted in line with inflation from 2030/31.
