The government’s receipts from inheritance tax (IHT) have been rising much faster than the yield from other taxes. In a recent report on the changing nature of UK tax revenues, the Institute for Fiscal Studies (IFS) noted that “There is an increased reliance on smaller taxes.” It attributed this shift to the political difficulties in raising rates of the major taxes, such as VAT, fuel duty and income tax.
IHT is a good example of one of the “smaller taxes” that is quietly producing an increasing slice of the total tax take, as the chart below clear shows. In 2016/17, IHT is projected to raise almost £5bn, more than double what it produced in 2009/10. There are many reasons why the Treasury’s IHT income is outpacing the growth in overall revenue, but the most significant are probably the freezing since April 2009 of the nil rate band – broadly speaking the amount of your estate (after any exemptions) not subject to tax at a flat rate of 40%. Average UK house prices have risen by more than 30% so far over the period that the nil rate band has been frozen, according to Nationwide. In Greater London, the increase exceeds 85%. It’s true that the government is introducing a main residence nil rate band (RNRB) in April 2017, initially at £100,000, rising to £175,000 by April 2020, but this will be of little or no help to some people.
The RNRB has also been criticized by the chairman of the Treasury Select Committee who said it failed to meet any of three requirements that: “Tax rules should aim to be simple, fair and clear.” While the RNRB is being phased in, the ordinary nil rate band will continue to be frozen, meaning its first increase above the 2009 figure of £325,000 will not occur until at least April 2021. The net result is that the government’s revenue from IHT is still forecast to rise over the period that the RNRB is introduced, according to the Office for Budgetary Responsibility.
If you do not want the Exchequer to be a major – or even the largest – beneficiary of your estate, then the sooner you begin planning, the better. The starting point is making sure your wills are up to date – or putting in place a will if you are currently relying on the vagaries of intestacy law. Once the structure of your will is settled, there are no simple rules of thumb for the next stage, other than to take expert advice. Estate planning requires a clear, holistic approach and needs to be integrated with other aspects of your personal financial planning. For example, from an IHT viewpoint, your pension plans may not be the wisest way of providing retirement income. The value of tax reliefs depends on your individual circumstances. Tax laws can change.
The FCA does not regulate tax advice.