Ever increasing IHT tax take and pension tax overpayments

23 July 2022

HMRC data shows the taxman received £1.8billion from IHT payments in Q2, 2022, £300 million up on the 2021 figure.

IHT receipts have doubled in the past 10 years, from £752 million in Q1 2012 to over £1.5 billion Q1 2022.

The freezing of the IHT nil rate band for a decade has contributed to the increase in receipts for HMRC, and with both the nil rate band and residence nil rate band frozen until at least April 2026, it is expected that IHT receipts will continue to rise.

Andrew Tully, technical director at Canada Life, said the figures showed “an incredible spike in income from IHT”.

He said: “This is a tax that is no longer just affecting the very wealthy in society and is increasingly catching out families who are unprepared or simply unaware. 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.”

Stephen Lowe, group communications director at retirement specialist Just Group, pointed out that the OBR forecast was that as many as 6.5% of estates could be liable for inheritance tax by 2026 – nearly double the 3.7% that the figures show for the latest financial year.

“The OBR also revised inheritance tax forecasts up by an average of £0.4 billion a year compared to October 2021 estimates because of increased mortality as well as higher house prices.”

Lowe added: “It makes good sense for people to keep track of the likely size of their estate and the tax rules that will apply to it. There are options available to people, such as lifetime mortgages, that can unlock some of the wealth tied up in bricks and mortar.

“These enable people to pass on wealth while they’re still alive and can see the benefits it brings the recipients; it may also help to minimise any inheritance tax on their estates. Professional, regulated advice can provide valuable help for people managing their finances in later life, including working out how their property may impact their estate planning.”

Pension tax overpayment

 HMRC has also seen a spike in pension tax overpayment reclaims in the second quarter of 2022 to £33.7m – a 50% increase on Q1 2022.

Jon Greer, head of retirement policy at Quilter, highlighted that 3,000 more claims forms have been processed in the period, “showing a marked increase on the number of people accessing their pension funds as the cost-of-living crisis intensifies, with this clunky system resulting in it taking much longer for them to access their full pension withdrawal.

The Q2 figures amount to an average tax reclaim of £3,363 per saver (7,412 forms) as a result of the incorrect amount of tax being charged from pension income.

Greer added: “This emergency tax situation can be particularly frustrating for people trying to access their funds quickly, particularly if they don’t understand why it has happened. It arises due to an oddity of the PAYE system when people start to take money from their pension.

“HMRC will make a repayment automatically, however given that could take time to be processed it is best to make a repayment claim to avoid waiting.

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