The taxman raked in £5.4billion in ‘death taxes’ from bereaved families last year, as rising property prices meant more estates than ever became liable for a levy originally aimed at the very wealthy.
The number of families paying inheritance tax has also risen, and accounted for 4.6 per cent or 28,100 of all deaths recorded in the UK over one year, official statistics show.
The upward trend is explained by rising asset prices and the freezing of the main inheritance tax threshold at £325,000 since 2009, according to HMRC.
The rapid house price inflation seen in the boom from 1997 saw property values spiral and has dragged many more families into the inheritance tax net
The rise in the inheritance tax take last year comes despite the introduction of a new own residence allowance that has boosted the amount that can be passed on inheritance tax free to direct descendants.
This extra allowance will rise to £175,000 per person from 2020, or £350,000 for a married couple or civil partners, and was £125,000 in the 2018 to 2019 tax year that the figures refer to.
The most recent figures for the proportion of families hit by inheritance tax are for a different period, 2016 to 2017, but this is likely to have continued to rise as the tax take has grown since.
The new figures follow two major studies by tax officials calling for an overhaul of confusing inheritance tax rules in favour of a single ‘personal gift allowance’, and a revamp of forms to make them shorter and simpler.
One of the reasons inheritance tax is so unpopular is that while a relatively small proportion of bereaved families have to fork out for estates over a certain level, half still have to fill in the form to notify the taxman even when there is nothing to pay.
A shake-up of inheritance tax could be looming if Labour win the next election, as it has floated plans that would remove a couple’s ability to leave almost £1million tax-free and replace this with a £125,000 per person lifetime gift allowance.
Above this level income tax rates would apply.
How does inheritance tax work?
Hated levy: The number of families paying inheritance tax has risen due to increased property prices and the freezing of the main threshold at £325k
Inheritance tax was originally designed as a levy on the very wealthy, but triple digit property inflation since the 1980s has dragged more ordinary families living in expensive areas into its net.
Nearly 5 per cent of people leave estates sufficiently large to make their beneficiaries liable for inheritance tax.
However, the property boom of recent decades means that figure is expected to rise, with those inheriting in house price hotspots bearing the biggest financial burden.
Essentially, you need to be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, for your loved ones to have to stump up death duties.
But a new own home allowance – known as the residence nil rate band – lets you pass on more than that.
If you have a partner, own a property, and intend to leave money to your direct descendants, that threshold has started to rise in stages and will reach a joint £1million by 2020.
If you are worth more than this, your heirs will have to hand over 40 per cent of your assets above those levels to the Government.
> Read more about reducing your inheritance tax bill here
HMRC revealed today that inheritance tax receipts rose 3 per cent, or £166million, to £5.4billion during the 2018-19 tax year.
The number of UK deaths resulting in an inheritance tax bill increased from 4.2 per cent in 2015-16 to 4.6 per cent in 2016-17 – the most recent year for which such statistics are available.
The total capital value of estates has swollen since 2009-10 by around £15billion to hit £80.1billion in 2016-17 – with four fifths of that increase resulting from the surge in residential property prices.
The new own home allowance – known as the residence nil rate band, and which lets some people to pass on more than the basic £325,000 to direct descendants – was introduced in 2017 and has not yet been incorporated into HMRC’s annual statistics.
The taxman says the proportion of all deaths liable to inheritance tax has fallen from a historic high of 5.9 per cent in 2006-07.
It puts this down to the introduction in 2007 of the ‘transferable nil rate band’, which passes unused allowance to a surviving spouse or civil partner, and the drop in asset prices after the financial crisis in 2008.
HMRC also reveals how much exemptions and reliefs can reduce families’ ultimate inheritance tax bills. The largest ‘exemption against assets’ was for transfers between spouses and civil partners in 2017-17. Two fifths of estates liable for inheritance tax took advantage of it, and saved some £9.7billion.
10 ways to avoid inheritance tax legally
How do you stop the taxman grabbing a big chunk of your estate from your loved ones. Read more here.
The combined value of agricultural and business property relief was £2.1billion in the same year, and the value of exempted transfers to charities was £1.8billion.
Estates valued at £1million or more accounted for 72 per cent of the total inheritance tax paid in 2016-17 – which was £5.1billion in that year – but only represented 3 per cent of all estates requiring probate.
Meanwhile, estates valued at less than £1million accounted for £1.4 billion of inheritance tax paid, and around 97 per cent of all estates requiring probate.
The chart below shows how the composition of assets changes between the various estate bands.
HMRC says: ‘Where net estate value is less than £1 million, estates are likely to consist mainly of residential property and cash.
‘Above this limit, estates are likely to consist of securities and other assets, which attract consist of securities and other assets, which attract reliefs like agricultural property relief and business property relief.’
The taxman also notes that London and the south east have the highest numbers of estates where inheritance tax must be paid.
‘In 2016-17, 55 per cent of the total amount of inheritance tax charged in England was concentrated in these regions alone – the average taxpayer in London was charged £226,000.’
Probate delays: Waits ‘getting back to normal’
Administrative ‘chaos’ and waits of 12-14 weeks when applying for probate to get control over a loved one’s estate have now eased, say lawyers.
A surge in applications ahead of fee increases of up to 2,700 per cent alongside a drastic overhaul involving staff cuts, office closures, new IT systems and changes to work processes had caused long delays.
Solicitors for the Elderly met with officials last week, and was told they are currently dealing with applications from the last week of July.
Chairman Michael Culver says: ‘We’ve been informed that things are getting back to normal, and within one month, application approvals should be back to pre-March return levels and timings.
‘Due to the proroguing of Parliament, the motion to approve the probate fee hike has now lapsed, even though the new fees originally had an implementation date of April 2019.
‘It’s a welcome relief to see this fall off the agenda, and we hope this is also the case in the next parliamentary session.’
London and the south east accounted for 48 per cent of inheritance tax charged across the UK.
The lowest paying regions were Wales, where people liable for inheritance tax forked out £127,000 on average, the north east where they paid £131,000 on average, and the north west where they paid £139,000 on average.
‘This may have been attributed to lower house prices in those regions,’ says HMRC.
What do financial experts say?
‘With the nil-rate band frozen at £325,000 for a decade, it is no surprise that HMRC continues to rake in record sums through inheritance tax,’ says Tom Selby, senior analyst at AJ Bell.
‘The world of inheritance tax is painfully difficult to navigate and while the wealthiest should be able to afford suitable advice to take advantage of the various exemptions and reliefs available, those who can’t risk being caught out.
‘As a minimum, the level of the nil-rate band should be looked at again and increased in line with inflation. Ideally a more fundamental Government overhaul of the inheritance framework should also be undertaken, aimed at simplifying the structures for investors.
‘Savers can mitigate HMRC’s inheritance tax grab by saving in a pension.
‘Under changes introduced in 2015 alongside the pension freedoms, untouched defined contribution pensions can be passed on tax-free to beneficiaries if you die before age 75, while if you die after 75 the money will be taxed in the same way as income when it is withdrawn.’
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: ‘A decade of property and share price growth has been a bonanza for the taxman – and he doesn’t let a little thing like death stand in the way of dipping into your pockets for a little bit more.
‘The freezing of the inheritance tax threshold for a decade has trapped thousands more people into paying tax when their loved ones die. So as we get older, it’s vital to consider inheritance tax, and take sensible steps to avoid paying more than we have to.’
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