Residential property
03 May 2018 News

Another bumper year for Inheritance Tax!

Inheritance Tax (IHT) is a “marmite” tax.  Those who like it see it as a way of redistributing wealth and those who hate it view it as an additional tax paid on assets on which they have already paid income tax or perhaps previously paid IHT when it was inherited. It is also a tax with peculiar complexities, particularly around farming, businesses and trusts.

During the tax year which has just ended in April 2018 the Government collected just over £5.2bn of IHT, an increase of 7% from the previous year.  Looking back to the depths of the recession in 2009/10 the IHT raised was just under £2.4bn.  The IHT collected has more than doubled in the last eight years and is well in excess of the previous high point, £3.8bn, in 2007/08.

The government might be marginally disappointed at the IHT received last year because in April 2017 they received 27% more than received in April 2016. As the year progressed the increase tailed off to a more “modest” 7%.  Part of that may be caused by the introduction of the highly complex and unfair residence nil rate band.  Time will tell as we begin to see the tax receipts for this coming tax year.

One of the undoubted reasons for the increased IHT received has been the freezing of the nil rate band, the first part of an estate on which there is no IHT. It has been fixed at £325,000 since 2009 and is scheduled not to change until 2020. However as house prices continue to rise, even with the introduction of the residence nil rate band, the amount of IHT payable by even modest estates will continue to increase unless action is taken to increase the nil rate band.

Correspondingly the other tax which generally affects gifting assets between the generations is Capital Gains Tax (CGT).  While IHT is generally not payable on transfers between individuals CGT generally is.  CGT is charged at significantly lower rates than IHT but the Government has seen a steady increase in the amount of CGT paid since 2009/10. In 2009/10 the CGT paid was £2.49bn while by 2016/17 it had risen to £7.88bn, albeit a fall from £8.4bn in the previous year.

As with all taxes careful planning can pay dividends but as the wealth gap appears to be increasing there is bound to be political tension between those who wish to see IHT, or a replacement for it, address and redistribute the wealth gap and those who believe that an individual should be free to pass their wealth on as they think fit, with minimum state intervention either by way taxation or restrictions on the ability to direct who receives their estate.

With the Office of Tax Simplification reviewing Inheritance Tax the next few years are therefore going to be interesting in the “wealth tax” arena. 

As published by The Financial Times, The Edinburgh Evening News and the Scotland on Sunday amongst many more. 

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