Will you be caught by inheritance tax?
Over the last few months, the increase in inheritance tax receipts received by HMRC has been widely reported. In the 12 months up to June 2021, HMRC collected £5.689 billion in inheritance tax.
HMRC’s increase in revenue from inheritance tax is likely to be a result of a number of factors, including, sadly, deaths as a result of the pandemic. There are other factors, however, that are also contributing to this increase in inheritance tax receipts: an increase in property values and the stagnation of the inheritance tax nil rate band. Whilst the introduction of the residence nil rate band in April 2017 has assisted many people to mitigate or avoid an inheritance tax charge, it is only available in certain circumstances.
Let me explain; every individual has an inheritance tax nil rate band of £325,000 and a potential residence nil rate band of £175,000. In addition, married couples can benefit from a transferable nil rate band and transferable residence nil rate band where the first to die has not used their own nil rate band. For example, because they left their estate to their surviving spouse/partner meaning their estate was exempt from any inheritance tax.
The nil rate band has been set at £325,000 since April 2009 and it was announced in the March budget that it would stay frozen at this level until at least April 2026. Although the residence nil rate band increases the amount that can be inherited tax free, a main residence must be inherited by a direct descendent (children, grandchildren etc) to benefit from this.
Whilst the nil rate band has not changed and will not change in the near future, the property market has seen rising prices for a number of years. House prices this year are widely reported to be 10.5% higher than a year ago. Due to this, estates that comprise a property or properties, which may previously have fallen within the nil rate band, may now find themselves subject to inheritance tax, particularly if the residence nil rate band is not available.
The property market seems to have slowed following the end of the Stamp Duty Land Tax holiday but decades of constant increases in property values means that current values are still some of the highest ever seen. More and more estates may become taxable in the future, further increasing HMRC’s inheritance tax revenue. Inheritance Tax was originally introduced with an intention to tax only the very wealthy.
With more and more estates being caught due to increases in property value, many are questioning whether the rules need reforming?
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: firstname.lastname@example.org