Inheritance Tax Receipts reach £7.1 billion from April 2022 to March 2023, up £1 billion year-on-year

HM Revenue and Customs (HMRC) reported this morning that inheritance tax (IHT) receipts rose to £7.1 billion from April 2022 to February 2023, which represents a year-on-year increase of £1 billion. The rising trend in IHT receipts has continued despite the government’s discussions to increase the threshold or reduce the tax rate ahead of the upcoming general election.

Rising House Prices and Inflation leading to increased IHT receipts

The increasing IHT receipts are being attributed to years of house price increases, particularly in the South East, combined with soaring inflation and tax freezes, leading to more families that do not consider themselves to be wealthy being pushed above the threshold for IHT. As a result, discussions surrounding an increase in the IHT threshold – which currently stands at £325,000 – or a reduction in the tax rate, are gaining more attention. However, with the deficit standing at £125 billion, or £1,870 per head of the UK population, these potential changes could prove to be an expensive tactic.

According to the Office for Budget Responsibility, IHT receipts could reach £7.2 billion this tax year, which represents 0.7% of all receipts and 0.3% of national income.

Alex Davies, CEO and Founder of Wealth Club, commented on the recent figures, stating, “The revenue generated from inheritance tax plays an important part in the government’s spending programme, and so it will be interesting to see if Rishi Sunak will opt to change this in a bid to win popularity in the upcoming polls.”

Ways to reduce IHT liability

Davies goes on to suggest several ways to reduce an individual’s IHT liability. One of the great IHT threats is an individual’s ISA, which is tax-efficient in many other ways but forms part of a person’s taxable estate, along with other savings, investments, and possessions. Up to 40% could be eaten up by inheritance tax rather than passed on to loved ones. An alternative option is investing in certain AIM shares within an ISA, as many qualify for something called Business Property Relief, which means that, providing they are held on death and have been invested for at least two years, they should be free of inheritance tax.

Another option is to give money away, as gifts taken out of regular income that do not affect the giver’s standard of living are inheritance tax-free on day one, as are certain smaller gifts. While you can give unlimited amounts away, typically, these take seven years to be completely inheritance tax-free. However, once the money is given away, the giver has lost control, and if they need it back for an emergency, that is not an option.

Investing in companies that qualify for Business Property Relief is also an option, as these are typically inheritance tax-free after two years. However, investing in smaller businesses can be risky, and unlike giving the money away, the giver retains control.

Putting assets into trusts can also help individuals to give away an asset to loved ones, potentially free of inheritance tax, while also enabling them to keep an element of control over decisions.

Lastly, it is essential to make a will, as if an individual does not, the law will decide how their estate is distributed, and it certainly will not be the most tax-efficient way.

Wealth Club is the largest non-advisory broker of tax-efficient investments such as Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS), and Inheritance Tax Portfolios. Its aim is to provide high net worth individuals and sophisticated investors with clear, impartial and well-researched information on investment opportunities not typically available through mainstream stockbrokers or financial advisers.