Inheritance tax receipts fell for the first time in a decade, reversing a trend of consistent growth, according to official figures from HM Revenue & Customs.
In the 2019/20 tax year, IHT receipts fell 4% year-on-year to £223 million, with fewer than 4 in 100 UK deaths resulting in an IHT charge. In total, the Government netted £5.2 billion for the year.
The introduction of the Residence Nil-Rate Band tax-free threshold in the 2017-18 tax year was the main reason for a drop in the number of people paying IHT last year, HMRC said.
The new legislation meant that in addition to the main £325,000 per person IHT-free allowance, people were allowed to pass on their primary home to a ‘direct descendent’ without paying tax on the first £100,000. The figure has increased by £25,000 each year since 2017/18, reaching £175,000 at the start of the current tax year.
HMRC said the new legislation also meant the total number of UK deaths that resulted in an IHT charge fell for the first time since 2009-10. In 2017-18, there were 24,200 deaths, a decrease of 14% on the previous year.
Gordon Andrews, tax and financial planning expert, Quilter, warned that the Covid-19 pandemic means any tax receipts in decline could become a target for the Chancellor.
Andrews said: “The reduction is credited to the introduction of the Residence Nil-Rate Band, which has been a controversial and complicated policy since its introduction in 2017. While it has spared many estates from a tax change, it adds a layer of complexity to the system. And this is not the only complication within the system by a long way. One of the main issues with IHT is how difficult it is to navigate, causing deep concern for people, the majority of whom may not be impacted.
“The Office for Tax Simplification has made a number of proposals to remove complexity and we hope that any future reform of IHT makes it easier for the public to navigate, rather than layering on tricky new rules. Complex tinkering could cause the Chancellor and wider Government more stress than it’s worth, so any reforms should be carefully considered.”
Tom Selby, senior analyst, AJ Bell, also believes the Chancellor may look to inheritance tax to help balance the books post-Covid-19.
Selby said: “Given the parlous state of the nation’s finances, it would be no surprise to see Osborne’s big IHT giveaway come under the microscope as his successor, Rishi Sunak, seeks ways to raise much-needed cash to pay for the nation’s eye-watering Covid-19 debts.”
