Families paid £4.4billion in inheritance tax in the six months to September as frozen thresholds dragged more people into the tax net. Latest HM Revenue & Customs figures show estates paid £100million more in IHT between April and September than they did in the same period last year. IHT is expected to deliver the Treasury a record £9.1billion this tax year, the Office for Budget Responsibility forecast earlier this year.
The headline rate of IHT is 40 per cent, charged on anything over the £325,000 nil-rate band. People passing on their home to direct descendants, children and grandchildren, are given an extra £175,000 allowance. Spouses and civil partners can also share their allowance, meaning a couple can pass on a total of £1million to their children tax-free.
The nil-rate band has not increased in line with inflation since 2009, and will remain frozen until 2030, which, alongside higher property prices, means more families will have to pay the death tax. From next year, full Agricultural and Business Property reliefs will be capped at £1million per individual before dropping to 50 per cent relief on assets over that value.
The following year, unused pension pots will be included in a person’s estate for IHT purposes, which is expected to bring more families into the scope of IHT. Ian Dyall, head of estate planning at Evelyn Partners, says the changes mean ‘households who would never consider themselves ‘wealthy’ suddenly face significant tax exposure.’
The Chancellor might look again at IHT in the Budget to plug a £30billion fiscal gap, with experts predicting a possible crackdown on gifting. She could introduce a lifetime gifting cap or extend the seven-year rule to 10 or more years.
‘The combination of unspent pension assets becoming subject to IHT, fears over possible restrictions to pension tax-free cash, and speculation that gifting rules could be tightened up, has caused some families to hastily withdraw pension cash and start giving it away,’ says Dyall.
Elsewhere, PAYE income tax and National Insurance contributions reached £235.3billion, which ‘remain artificially inflated by the freeze to tax thresholds,’ says Rachael Griffin, tax and financial planning expert at Quilter.
‘This doesn’t point to a roaring economy but a sign of a Treasury increasingly reliant on extracting more from the same taxpayers.
‘With fiscal drag proving such a dependable source of income, the Chancellor may now be tempted to delay any unfreezing of thresholds, despite the political awkwardness that would bring.’
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