Inheritance tax receipts up 10% year-on-year

New figures published today show that the inheritance tax (IHT) collected so far this tax year is up 10% over the same period last year.

Between April and August 2023, HMRC collected £3.2bn in IHT, around £300m higher than in the same period last year.

The higher receipts are likely to be due to a combination of factors including rises in asset values and the freezing of IHT tax-free thresholds at their 2020/21 levels - levels which are set to remain frozen until 2027/28.

While the figures for August show a slight increase over July, they didn’t reach the levels recorded in June when IHT receipts reached their highest monthly total on record. HMRC notes that one factor behind June’s figures may have been the impact of interest charged on late payments. This is currently at 7.75%, the highest level for 15 years.

IHT is chargeable both on death and during your lifetime on certain gifts. It usually only impacts those with an estate worth more than the ‘nil rate band’, currently £325,000, and the main rate is 40%.

Elsa Littlewood, a tax partner at BDO said:

“Planning for what happens to your wealth when you pass away is important - not least because you want to ensure that your assets are passed on to the people you want to receive them.

“Talking about what happens after we die is difficult, but too many people don’t put plans in place which can mean your hard-earned wealth goes to the wrong people and your estate may pay more inheritance tax than it needs to.”

BDO has put together a list of top 10 actions you can take to ensure that your loved ones receive the inheritance you wish them to:

Check your will reflects your current wishes (you may have had additional grandchildren since you last looked at it) and is fit for purpose given any legislative changes since it was written. You should also take advice from your tax adviser to make sure your wishes are carried out in way that means your estate does not pay more tax than it needs to. This should be reviewed regularly, to update for changes in your circumstances and the law and practice.
Consider making gifts while you are in good health. Generally, if you live more than seven years after a gift is made, then this will not be counted as part of your estate on death and will not be subject to IHT. For example, if you make a gift of £100,000 to each of your two children, but die within three years, your children could have a tax charge of £80,000 (assuming you had used your Nil Rate Band on earlier lifetime gifts), which could also apply from your estate if you had not made the gift. After three years, the amount of your gift will attract a lower tax charge, reducing to nil if you live for seven years after you make the gift. However, you need to make sure the gift is effective; for example, if you give away an asset like a holiday home but continue to use it, the value of the property may stay in your estate for IHT purposes. To share your wealth in a tax-efficient way, you may also wish to consider paying into your children’s ISAs or setting up your grandchildren with a LISA to help them get onto the property ladder.
Make sure you qualify for the full Residential Nil Rate Band; this is an additional tax-free amount of £175,000 where your home is passed to a descendant (e.g. child, grandchild etc) – a potential IHT saving of £70,000 for the estate of each spouse. To qualify:
1. You need to leave your home to your descendants.
2. Be careful about downsizing. If you downsize, say from a £500,000 property to a £250,000 property (or sell and no longer own a home outright), you may still be able to benefit from the full Residential Nil Rate Band entitlement but only if you meet a number of conditions.
3. If your estate is over £2m the Residential Nil Rate Band is tapered away, so it may be appropriate to gift assets during your lifetime to reduce your estate to below this £2m threshold.
Check your life insurance paperwork to make sure all policies are written into a suitable trust, given your wishes and circumstances. If a policy is not in a valid trust, the value may remain in your estate and be subject to a 40% IHT charge.
If you donate 10% of your total estate to charity, your estate may benefit from a reduced IHT rate: 36% as opposed to 40%. To qualify:
1. Check that your will is drafted in such a way that your gift will reach the 10% threshold and qualify your estate for the lower rate of IHT. For example, if you have specified a particular sum or asset to your chosen charity, it may be that your estate has increased in value so that the sum no longer amounts to at least 10% any more.
2. Check that your donation is to a qualifying charity, in particular, from 6 April 2024 only UK charities will qualify (i.e. EU charities are no longer included).
Business Relief – there is a 50% or a 100% exemption from IHT for qualifying business assets and particular interests in businesses which is a very valuable relief. However, there are some pitfalls such as where a business also owns investment assets or large cash balances. If you are relying on this relief to pass on a family business to the next generation, for example, then you and your tax advisers should review the qualifying nature of that business each year when you produce the accounts.
Agricultural Relief – there is a 50% or a 100% exemption from IHT for qualifying agricultural land and other assets which is also a very valuable relief, particularly in the context of a family farm which is to be passed to the next generation. It should be noted that from April 2024, this only applies to UK agricultural land, not EU. So if you want to pass on a French vineyard or Spanish finca, it may be subject to IHT in future.
Make sure your will appoints competent executors. IHT penalties increased by more than a third in 2022/23 to £2.28m for incorrect IHT calculations. If the error is due to failure to take “reasonable care”, the penalty can be up to 30% of the additional tax owed. If it is deemed to be “deliberate”, it can be up to 70% and if it is “deliberate and concealed”, the penalty can be up to 100% of the additional tax owed.
Crypto assets – for non-doms, HMRC consider that exchange tokens (with no underlying asset) are a UK asset where the beneficial owner is resident in the UK and, as such, they will be liable to UK IHT which is a different approach to most other assets.
Some non-tax points:
1. Talk to your family and friends so that there are no surprises or disputes later on. Communication really does prove to oil the wheels of continuing family cohesion once you have passed away.
2. Make sure your executors have details of all your assets, for example they are able to access any crypto assets.
3. Where there is a trust, make sure the Trust Register is correctly completed and kept up to date. Registration is required, subject to several exemptions, even when the trust does not have a tax liability.

ENDS

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