Inheritance tax up 38% since 2020 and CGT up 84%

New figures reveal huge tax grab, writes interactive investor's Alice Guy.

Interactive investor comments on new tax figures from HMRC.

Alice Guy, Head of Pensions and Savings, interactive investor comments on inheritance tax: “Soaring inheritance tax takings highlight the cold efficiency of fiscal drag as frozen tax thresholds drag more and more households into the tax net. Rising property prices since 2009 mean pensioners with modest incomes who’ve never felt rich could be left with a huge tax bill when they pass on wealth. The average home in London is now worth £525,000 and could attract an inheritance tax bill of £80,000, depending on other reliefs.

• Learn more: SIPP Tax Relief Explained | SIPP Dividend Tax | SIPP Investment Ideas

“The £325,000 nil rate band has been stuck at the same level since 2009, dragging more and more households into the inheritance tax net.

“The residence nil rate band of £175,000 means that some taxpayers get to pass on £500,000 tax-free, (£325,000 plus £175,000). But the uneven rules mean the residence nil rate band only applies to people passing on a home to their children or grandchildren and taxpayers who rent or don’t have children could have a bigger tax bill.”

Alice’s IHT tax tips:

• If you can afford to give away lifetime gifts, then this can be a great way to reduce your inheritance tax bill. You can give away up to £3,000 each tax year and put that money immediately outside your estate for IHT purposes.
• Be careful as giving away assets could trigger a capital gains tax bill.
• Giving away larger amounts could save on inheritance tax, but you’ll have a to survive for seven years for those assets not to be taken into account for inheritance tax.
• If you own a range of assets, then it could make sense to plan the order you use your assets. Pension wealth, for example, won’t be counted for inheritance tax. Take advice to make sure you’re on track to minimise your tax bill.
• Make sure you have an up-to-date will as it’s easy to pay more tax than necessary as how you leave your assets could affect your tax bill.

Capital gains tax

Source interactive investor. Background: capital gains tax annual exemption is more than halving, going from £12,300 to £6,000 in April 2023 and £3,000 from April 2024.

Alice Guy says: “The rising capital gains tax bill is just a mild foreshadowing of things to come. The capital gains tax bill is increasing even before the annual allowance was cut in April 2023, so there’s more pain to come for investors and buy-to-let landlords.

“The amount collected in capital gains tax has doubled in the last five years and increased fourfold in the last 10 years. And there’s more to come, as the annual capital gains tax allowance has been cut from £12,300 to £6,000 this tax year and £3,000 next tax year, meaning that a modest £10,000 capital gain on shares with no tax bill in 2022-23 will cost £800 CGT this year, compared to £0 last year.

“For investors, is important to protect your wealth inside a tax wrapper such as an ISA or SIPP. Investments held inside an ISA or pension won’t attract capital gains tax or dividend tax, which can slice into your investment wealth over time and seriously dampen your returns.”

Fiscal drag and income tax

Myron Jobson, Senior Personal Finance Analyst interactive investor, says: “The latest set of HMRC tax receipts shows that the secret tax strategy is paying off in a big way for the government, with the government’s tax takings remain on the upward trajectory.

“It is no secret that public finances aren’t in the best of shape following the government’s colossal spend on Covid and latterly cost-of-living support measures. Instead of changing the income tax rates, the government has chosen not to raise the personal allowance in line with earnings or inflation. This means we’ll all pay more in tax - but in a less obvious way. It creates a situation where workers pay more taxes and have less purchasing power, even when earning more.

“This so-called fiscal drag hits us all – even if we don’t change tax band. That’s because as our pay rises with inflation, more and more of our pay packet is taxed and our overall tax burden increases. Our calculations shows that someone earning £30,000 is set to pay £398 more in tax this tax year because of fiscal drag.

“Personal Allowance and income tax thresholds are frozen until 2028 at present – meaning as our earnings grow, the longer the freezes remain in place, the more the effect is magnified.”