Inheritance tax receipts (IHT) have dipped for the first time in a decade, reversing a long term trend, and prompting renewed calls for a change to the regime
According to the latest HMRC figures, in 2019-20 IHT receipts decreased for the first time since 2009-10, with HMRC collecting £5.2bn down by 4% (£223m) on 2018-19.
HMRC’s analysis suggests this is likely because of the effects of the introduction of the residence nil-rate band (RNRB) in 2017-18, as there is a delay between death (when the tax charge is created) and receipts (when HMRC receives the tax payment).
Prior to 2017-18, this proportion had been increasing. From 2009-10 to 2016-17, it grew by 0.3 percentage points a year on average. This is likely due to both rising asset values over the period and the freezing of the tax-free nil-rate band (NRB) threshold at £325,000 since April 2009.
In its first year of operation, 20,200 estates used the RNRB threshold, and £3.1bn of chargeable estate value was sheltered from an IHT charge as a result.
HMRC’s data shows that in 2017-18, 3.9% of UK deaths resulted in an IHT charge, decreasing by 0.7 percentage points since 2016-17.
The introduction of the RNRB also means the total number of UK deaths that resulted in an IHT charge has fallen for the first time since 2009-10. In 2017-18 there were 24,200 such deaths, a decrease of 3,900 (14%) since 2016-17.
Last year an Office of Tax Simplification (OTS) report called for reforms to the IHT regime, to make the tax simpler, more intuitive and easier to operate, after a review reported many taxpayers found it too complex and confusing.
The OTS recommended government action regarding the taxation of lifetime gifts; looking at who pays tax where lifetime gifts are taxable; simpler exemptions for lifetime gifts; and a review of business exemptions to ensure they are focused on the policy goals and are consistent across different taxes.
Since the Covid-19 pandemic, there have also been calls for the government to re-assess how the UK’s wealthiest individuals are taxed, given the differences between the taxation of income and assets.
Tom Elliott, partner and head of London private clients at Crowe UK, said: ‘Whilst IHT has generated more than £5bn in each of the last three tax years, it remains a very small part of the total revenue collected by HMRC.
‘To be more specific, the total IHT paid in 2019/20 represented less than 1% of the total tax take for the UK.
‘That is not to say that a figure of £5bn wouldn’t be missed but in the grand scheme of things, this is a tax that receives more attention than, for example, income tax, which generates £194bn in revenue, National insurance (143bn) and VAT (£13bn).
‘It must, therefore, be acknowledged that IHT is more of a policy tax and political tool than a revenue raising strategy.
‘Indeed, so few estates pay the tax that it would hardly be a vote-loser if the rate was increased. If anything, such a proposal would be a politically positive step.
‘So what is the future of IHT? My personal view is that, if the Treasury is seriously considering an annual wealth tax, this would provide the perfect opportunity to not just reform IHT but do away with it completely.
‘Politically, the government would be seen to be continuing to tax wealthy estates, albeit in a different format and if a wealth tax is deemed necessary, it will be more acceptable to those exposed to it if they were to be excused from their current exposure to IHT.’