Inheritance tax payments surge on eve of Budget

The latest receipts from HMRC published on the eve of the Budget show the taxman is on course to take a record £5.5 billion from people’s estates this tax year, according to NFU Mutual.

Inheritance tax receipts went up by more than £420 million compared to the same time last year, despite the government’s latest inheritance tax relief initiative – the new Residence Nil Rate Band (RNRB) – which was introduced in April.

In a nutshell the RNRB allowance (currently £100,000 per person, rising progressively to £175,000 in April 2020), used together with the existing allowance of £325,000 per person or £650,000 for married couples and civil partners, will enable couples with a home to pass on up to £1 million to their direct family free of inheritance tax when it is fully phased in. 

Sean McCann, chartered financial planner at NFU Mutual, says: ‘Inheritance is a rich vein for the Treasury to tap into, and with receipts growing so quickly there is every chance the chancellor could drain family wealth even further in the Budget.’ 

However given the introduction of the RNRB and slowdown in property prices, the chancellor cannot count on greater numbers of ordinary families drifting above the nil rate band threshold. McCann adds: ‘It’s clear that the taxman is cracking down hard on inheritance tax by looking more closely at people’s estates and challenging claims for reliefs.’ 

 He points out that ‘when inheritance tax receipts rise, it’s usually because of a buoyant housing market.’ But now that property prices are no longer booming, this increase in receipts is probably cause by ‘a more aggressive approach to inheritance tax’.

Inheritance tax planning tips

Generally, gifts are treated as ‘potentially exempt transfers’ or PETs for the purposes of inheritance tax (IHT). That means anyone gifting assets must survive for another seven years after making their gift for it to drop out of their estate completely. However, some gifts are immediately IHT exempt.

• Grandparents can give up to £2,500 to each grandchild as a wedding gift without the gift being counted as potentially part of their estate. Parents can gift up to £5,000.

• There is also an 'annual exemption' that lets you gift up to £3,000 each tax year, and you can carry over unused allowance from the previous year, enabling you to gift up to £6,000. A couple could therefore give away £12,000 in a single tax year, without any liability to IHT. 

• Regular gifts, for birthdays for example, are also permitted, as is any number of small gifts up to £250, provided you have not already given the recipients 'exempted' gifts in the same tax year.

• Gifts to registered charities and political parties are tax exempt.

• Another way to exempt a gift from IHT is to make the gift out of normal expenditure. Unlimited amounts of surplus income can be gifted during your lifetime, as long as this is not at the expense of your usual standard of living.

Keep a formal record of the IHT-exempt gifts you make, as HMRC may require proof of your intentions.

Tax planning is a complex area, particularly in the case of IHT planning, so it is worth seeking the advice of a reputable independent financial adviser or financial planner.

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