The deep freeze in the tax threshold has dragged more and more households into the tax net.
Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The number of estates pushed into the IHT tax net jumped to 27,000 in the tax year 2020 to 2021 – up 17%, or 4,000, from the previous tax year, resulting from the deep freeze in the main inheritance tax (IHT) threshold since 2009. This represent the biggest spike in IHT tax liabilities since 2014 to 2015 when tax liabilities rose by 25% (£840 million).
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“The Covid-19 pandemic was sadly a significant contributor to the surge in IHT liabilities. It resulted in a rise in wealth transfers and deaths leading to IHT liabilities.
“Meanwhile, growth in house prices, investments and savings (which are among the key assets factors when calculating IHT liability) means that even relatively modest estates crossed the IHT threshold.
“If uprated with inflation, the IHT nil rate band of £325,000 would have risen to just under almost £494,000. In other words, the deep freeze in the IHT thresholds has cost families £159,000 since 2009.
“IHT is a money spinner for the Treasury, with IHT receipts up 38% since 2020. The tax generated a record £7.1 billion for the public kitty in the year to March 2023 - which is £1 billion higher than the same period a year earlier. The freezing of the nil rate and residence nil rate bands until at least April 2028 means an increasing number of estates will be subject to the death tax over time.
“While a forecasted dip in property prices could limit growth in the government’s IHT takings, the Office for Budget Responsibility (OBR) expects IHT to raise £7.2 billion in the 2023-24 tax year rising to a massive £8.4 billion by 2027-28.
“IHT continues to shift away from being a tax on the wealthy, as originally intended, to one paid by more modest estates thanks to runaway house prices and solid investment returns over the long term. While no one likes to think about their own mortality, it is important to have your finances in order before you shuffle off this mortal coil to ensure that the taxman doesn’t take more than his fair share.
“You can reduce IHT liability by making use of gifting allowances, trusts and pensions (which are normally free from IHT). It is worth consulting a qualified adviser to work out the value of your estate and how much tax you might be likely to owe.”
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