As part of the Autumn statement, Chancellor Jeremy Hunt announced that inheritance tax (IHT) thresholds will be frozen for two more years, increasing the Treasury’s tax take over time and the need for financial planning.
The inheritance tax nil rate band has been set at £325,000 per individual since 2009, and £650,000 for a married couple. The residential nil rate band of £175,000 can extend this to £500,00, or one million pounds for a married couple.
If the nil rate band had risen in line with inflation, today this would be worth £407,000 and projected forward to tax year 27/28 this would be over £500,000, which is the current combined standard and residence nil rate band.
According to the OBR projections, this would lead to an increase in IHT receipts from £6.1 bn 2021/22 to £7.8bn in tax year 2027/28 – an increase of 28%.
Helen Morrissey, senior pensions analyst, Hargreaves Lansdown, commented: “Inheritance Tax (IHT) used to be seen as a wealthy person’s tax, but a mix of booming house prices and threshold freezes mean this is no longer the case. This latest freeze will only make matters worse. Inheritance tax (IHT) receipts received by HMRC during the financial year 2021/22 were at an all-time high of £6.1 billion, with estates over this level facing eye watering 40% tax bills.”
Andrew Tully, technical director, Canada Life concurred: “This stealth tax increase will mean more people being caught by the IHT trap and having to complete IHT returns and pay IHT on their estates in the near future.
He highlighted the importance on “early planning and using trusts” to avoid the Treasury becoming one of the largest beneficiaries from an estate, with the advantage that “trusts give control over who benefits from assets”.
He added: “We should be mindful that also not everyone would receive a residence nil rate band as unlike the standard nil rate band there are certain qualifying criteria, which has to be met and net estates over £2m will have this reduced by £1 for every £2 they are over this threshold.”
John Winstanley, a director at Clarion Wealth Planning, said the freezing of the IHT bands “brings estate planning into further focus. A robust lifelong financial plan can help to highlight a client’s potential exposure to this tax, as well as evidencing the affordability of numerous options to mitigate taxes due on death.
“Furthermore, the current downturn in global stock markets potentially provides an opportunity for clients to shift invested wealth into alternative inheritance tax-efficient structures, such as trusts, at a lower value, which will provide greater benefit as investment valuations recover.”
Recent research from Handelsbanken Wealth & Asset Management shows that more than half (52%) of UK adults want to see Inheritance Tax (IHT) scrapped or at least reduced.
The issue unites men and women, almost all age groups, regions and even political views, the bank said, with scrapping or reducing IHT commanding broad support. However, it found “some support for keeping IHT levels as they are”, with 21% preferring the status quo, while 12% would support a rise in IHT.
Christine Ross, client director and head of Private Office (North) at Handelsbanken Wealth & Asset Management, commented: “Whilst there was no increase in the headline rates of tax, the pain will certainly be felt though the freezing of allowances and thresholds, even more so due to the current rate of inflation. Higher earners, already impacted by the loss of their personal allowance on income over £100,000 will now have to pay 45% tax on income over £125,140.
“These measures have significant tax raising potential with the reduction in the annual capital gains tax allowance alone (often unused by many savers) projected to raise £440m in 2028. It is also worth considering how many individuals will now have to file a self-assessment tax return as a result of some of today’s announcements.”
Mark Collins, head of Tax at Handelsbanken Wealth & Asset Management added: “The fact that IHT receipts are at an all-time high both in nominal terms and as a percentage of GDP underlines how important the tax is to the total Government tax take.
“Government forecasts indicate IHT receipts are set to rise to more than £6.7 billion in the current tax year, which again underlines the importance of seeking advice and regularly reviewing [financial] affairs to reduce exposure to inheritance tax.”
