The inheritance tax nil rate band should increase to £460,000 in line with inflation, according to tax experts.
The nil rate band has been frozen at £325,000 since 2009 and will remain at the same level until at least 2026, following an announcement by the Chancellor to freeze taxes for the next four years.
However, if the nil rate band had increased in line with inflation, it would be £460,000 today, and as much as £500,000 by 2026.
While IHT has historically been aimed at the very wealthy, soaring house prices have resulted in more people becoming liable to pay the tax. The average cost of a UK property in June 2022 was £294,845, compared to £154,716 in 2009.
The latest data from HM Revenue & Customs showed IHT receipts in 2021/22 rose to £6.1 billion, up 14% on the previous year and the largest single-year rise in IHT receipts since 2015/16.
According to forecasts from the Office for Budget Responsibility, this figure is expected to reach £8.3 billion by 2026.
Andrew Tully, technical director at Canada Life, says: “The nil rate band for Inheritance Tax has been frozen for more than a decade and as a result is woefully lagging behind inflation. IHT is a very valuable tax for HMRC, delivering £6.1 billion to the taxman in 2021/22, £729 million more than the previous year.
“This year’s surge in income 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 Just Group, said the number of estates subject to IHT will rise going forward.
Lowe comments: “The number of estates liable for tax is edging up again after falls most likely due to the introduction of the Residence Nil Rate band. Of the 612,000 UK deaths there were 23,000 liable for the tax in 2019/20, equal to 3.76% or about one in every 27 estates.
“That is a lower proportion than the peak in 2005/06 of nearly 6% of estates, but the numbers are expected to increase as more are dragged into the tax net due to the freeze in the current thresholds expected to be in place until the 2025/26 tax year.”
Experts said that taking steps including setting up a trust, making full use of gift allowances to pass money to family and making a will can all help to reduce IHT bills.
Lowe says lifetime mortgages are also increasingly being used to release some of the value tied up in property so that it can be gifted to children early.
Lowe says: “This growth has been helped by low interest rates and the introduction of more flexible options such as interest-servicing on lifetime mortgages meaning the size of the loan does not increase over time.
“Using the wealth tied up in bricks and mortar can help people meet their goals in later life, whether that is to use that wealth to boost consumption in retirement or to bequeath it in a tax-efficient manner.”
Shaun Moore, tax and financial planning expert at Quilter, adds: “With many more people likely to face a hefty IHT bill in the coming years, it remains vitally important that people start to have conversations with their loved ones to fully understand their estate and the value of it sooner rather than later. While it is not always the easiest conversation to have, it is far better to have it now than during more emotionally challenging times such as following a death.
“While the entire IHT take is small change for the government compared to other forms of tax, it is growing steadily and will always be in focus when it comes to the government looking for ways to plug holes in public finances. IHT is a complicated tax and one that requires a good level of knowledge to ensure you pay the right amount.”
