HMRC collects record £5.4bn ‘death taxes’

The government’s coffers have been boosted by a record £5.4bn in inheritance tax, new figures have revealed.

The number of estates paying inheritance tax (IHT) has also risen sharply, with figures released by HM Revenue & Customs (HMRC) revealing 28,100 estates paid it in 2016-17, an increase of 15 per cent on the year before.

Of the £5.4bn raised, 72 per cent of this was collected from estates worth £1m or more. On average, liable estates paid £179,000 of tax.

The upward trend is explained by rising asset prices and the freezing of the main IHT threshold at £325,000 since 2009, according to the taxman.

As I have stressed before, while IHT receipts are on the rise in a big way, people’s understanding of the system and how it could help them pass wealth onto their beneficiaries isn’t anywhere near as high.

A survey this summer from wealth management specialist Quilter revealed that only 37 per cent of those asked were aware of IHT rules. And under half of those quizzed knew about basic IHT rules around gifting or the nil rate band.

Meanwhile, July saw the publication of the long-awaited second report on IHT from the Office of Tax Simplification (OTS) with a range of useful proposals.

Focused on simplifying the structure of IHT, the report contained some surprises, not only in the recommendations it made, but also in those areas it has left untouched.

The OTS suggests that the annual exemption (£3,000 since 1981) and the wedding gifts exemption (a maximum of £5,000 and a minimum of £1,000, unchanged since 1975) should be combined into a single ‘personal gift allowance’.

While no specific number was pinned on the new allowance, the OTS did note that the annual allowance would be £11,900 in 2019/20, had it been inflation proofed.

Currently you need to survive seven years for any lifetime gifts not to form part of your estate on death and, in some instances, gifts made up to 14 years before death could affect the level of tax payable.

The OTS says that only gifts made within five years of death should be relevant.

That sounds like good news, but there is a sting in the tail: the OTS wants to scrap taper relief, which currently reduces the tax payable – if any – on gifts made more than three years but less than seven years before death.

The paper also discusses the availability of 100 per cent business relief for holdings of AIM shares, but does not propose the relief’s withdrawal.

However, it does make some recommendations about business relief generally and its twin, agricultural relief, which could have a major impact.

The OTS is now being considered by the Chancellor. What changes we will see, if any, depends very much on the political landscape, if there is a general election soon and the winner of that poll.

Amid all the uncertainty, there are ways in which the existing IHT regime can currently benefit your own estate planning and ensure a fairer distribution of your assets through your family.

The £3,000 a year annual gift allowance is good place to start. So is reviewing your will and making sure your assets will be dispersed the way you wish.

To discuss if your estate planning is up to date, or any other tax issues please contact me on 01772 430000.