Inheritance tax (IHT) receipts are set to rise to record levels as the tax man continues to “harvest more revenue” from household finances.
HM Revenue and Customs (HMRC) today confirmed that IHT receipts for April to December 2023 came to £5.7billion.
This represents a 7.5 per cent increase and is £0.4billion higher from the same period the previous year.
The Treasury is set to take record receipts of about £7.6billion from inheritance tax in the 2023/24 tax year.
Inheritance tax receipts are to hit record high
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Experts have cited the impact of fiscal drag as to why more households are being pulled into paying the levy.
The value of estates has increased, thanks to rising house prices, while the threshold for paying inheritance tax has stayed the same.
Currently, Britons pay IHT after someone has passed away when the value of the estate exceeds £325,000. The tax band rate remains at 40 per cent.
Laura Hayward, a tax partner at Evelyn Partners, highlighted how fiscal drag operates when it comes to inheritance tax.
She explained: “IHT is harvesting more in revenue than was ever forecast as rising house prices and growth in investment assets have boosted the value of estates over the last couple of decades.
“This has drawn more estates, and more assets in each liable estate, over the threshold at which IHT kicks in, which has been frozen at £325,000 since April 2009. Modest property downturns as we have seen in the last year or so will do little to dent this trend.
“In recent years there has also been a Covid effect on mortality which has further increased the overall IHT take.”
According to the tax expert, the levy is “widely unpopular” and is expected to be cut in the upcoming Spring Budget.
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Fiscal drag is pulling taxpayers above the levy's tax threshold
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However, she believes there are tax reform options which “would more to protect families” from paying off expensive taxes, such as raising the nil-rate band.
Ms Hayward added: “Property and investments tend to rise in value over the long-term so if nothing is changed, more of households’ carefully saved assets will surge above the nil-rate band - which would now stand at £489,700 had it risen with inflation since April 2009.
“Ironically of course, it’s the fiscal drag effect across the board of taxation that could end up giving Jeremy Hunt the headroom to cut taxes this spring, as frozen allowances and bands look set to take more tax revenue from rising income and wealth in the coming years, and that in turn improves the outlook for the public finances.
“As an IHT cut would have little immediate impact on households’ financial situation, it’s perhaps more likely that a pledge on inheritance tax will feature in the Conservative manifesto rather than in the Budget – particularly as it might appeal to and motivate some of the party’s core voting demographic.”