In a recent report from HM Revenue and Customs (HMRC), it was shown that the amount of income generated from Inheritance Tax (IHT) decreased to £5.2 billion last year, which is a decrease of £223 million or 4%. This was the first decrease in a decade. The last decrease was seen in 2009/2010 when estate values took a hit following the global recession. Since then, the amount of tax paid rose annually at a steady rate of an average of 3% or £4,200 per estate.
HMRC is attributing this most recent reduction to the introduction of the Residence Nil Rate Band back in April 2017, the impact of which takes time to sieve through the system. The objective of this policy was to give individuals the opportunity to inherit family homes with a value of up to £1 million tax-free (if a couple combined their IHT allowances). When the policy was first introduced, the Residence Nil Rate Band was set at £100,000 and this was in addition to the main Nil Rate Band allowance of £325,000. The band currently sits at £175,000 after increasing with inflation by £25,000 per year since 2017, providing a total allowance of £500,000 per individual or £1 million per couple, for those married or in a civil partnership, if combined.
The introduction of this policy has meant that the total number of deaths that would require IHT payments has declined. Since 2017, it has excluded 3,900 estates from requiring IHT completely and allowed people to shelter £3.1 billion. The additional allowance gives people the ability to pass up to £1 million to loved ones without paying tax on it.
Is possible relief in sight?
The Government has been looking at the possibility of introducing an annual wealth tax, especially now as they actively discuss how to generate revenue to help the country recover from the cost of the COVID-19 pandemic. Experts say that if a wealth tax were to be introduced in the near future, it would provide an excellent opportunity to scrap IHT as those subject to both taxes would likely be opposed to it otherwise.
IHT has never been part of the Government’s strategy to generate revenue as it only brings in less than 1% of the total tax take for the UK. So, it’s future will be interesting to follow in the coming weeks and months as we learn more about how the Government intends to reduce the economic impact of the pandemic.