Inheritance tax revenue has exceeded the £5 billion barrier for the first time, with bereaved families stumping up £5.228 billion in the last tax year (2017/18) – 8% more than the previous year.
According to the stats from HMRC, this increase is despite the introduction of the new residential nil-rate band in 2017. This policy was designed to reduce the burden of IHT by gradually increasing the amount homeowners can pass on to direct descendants without the tax being applied.
In 2017/18, it offered an additional allowance of £100,000 on top of the existing nil-rate band – currently £325,000. It will increase by a further £25,000 each tax year until it reaches £175,000 in 2020/21. In the current tax year, it stands at £125,000.
The HMRC figures also show that the number of people being forced to pay IHT is rising. In 2015/16 (the most up to date analysis available), IHT was payable on a total of 4.2% of estates, up from 3.9% in 2014/15 and 2.7% in 2009/10. The average IHT bill in 2015/16 was around £180,000.
Experts say the figures highlight why the IHT system needs to be reformed.
Steve Webb, director of policy at Royal London, says: “The amount of money raised from inheritance tax has doubled in less than a decade, and a steadily rising proportion of estates are now caught within the inheritance tax net. Even the introduction of an additional nil-rate band for families passing on a home to their children was not able to stem the growth in IHT revenues. Yet the tax remains complex and riddled with anomalies. It remains the case that IHT is a complex tax largely paid by those who do not have access to financial advice, and the sooner it is overhauled the better’.
Rachael Griffin, tax and financial planning expert at Quilter, adds: “When inheritance tax was first introduced in 1796 it was known as legacy, estate and succession duties and was collected on properties worth over a certain value. By 1857 this value had settled at £20, but duties were rarely collected on properties under £1,500. Since then, this simple tax has been shaped and reformed and now we have a system with numerous legacy clauses and exemptions, causing havoc and confusion for those looking to navigate it.”
She adds: “The Office of Tax Simplification has been undergoing a review of inheritance tax and we hope the government use the findings as an opportunity to make reforms that will simplify this overly complex piece of taxation. There are simple changes that can be made so that people don’t need technical training to navigate the system. One such change is remove the overly-complicated residence nil-rate band and instead increase the nil-rate band to £1 million.