UK households pay extra £ 100m in controversial IHT, and there’s no sign things will improve

UK households paid an extra £ 100m in inheritance tax (IHT) in the first two months of the financial year, figures from the HMRC show.

The total amount the Government received in death duties hit £ 1.1bn across April and May – a 10 per cent increase on a year ago.

Inheritance tax remains one of the UK’s most contentious taxes.

Critics argue it is unfair that children and dependents should have to pay tax on assets accrued by their parents and other family members and question why they shouldn’t be able to pass on their hard-earned gains without a hefty portion going to the UK’s tax office.

They say this is especially the case because these assets will have been acquired by wealth that has already been taxed, and so are at risk of double taxation.

On the other hand, inheritance tax is seen as a way to tackle wealth inequality. Wealth begets wealth. And without an effective inheritance tax system, more money would simply pass to families who already enjoy a privileged lifestyle.

i takes a look at what IHT is, why it is so controversial, and what could happen to it in the future.

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Inheritance tax receipts growing

There is no easy alternative to the UK’s current inheritance tax system. Realistically the Government is not going to reform the system any time soon at the risk of alienating its core middle-class voters.

Arguably, there is also no immediate urgency for the Government to change the tax, as inheritance tax receipts should continue rising over the next few years.

Inheritance tax is forecast to raise £ 6.7bn for the Treasury this year – up from £ 6bn in 2021 and £ 3.1bn a decade ago – thanks to rising property prices, and the fact the threshold at which families start paying inheritance tax has been frozen for many years.

Currently, most families in the UK will not have to worry about inheritance tax. It is only applied to assets worth more than £ 325,000 and if you are passing on a family home to direct dependents, such as children or grandchildren, you get a further allowance of £ 175,000.

Married couples, or those in a civil partnership, can combine their allowances. So families may only have to pay inheritance tax, which has a tax rate of 40 per cent, on estates worth more than £ 1m.

But thanks to booming house prices, many more families are finding the total value of their estate – including property, savings and other assets – is likely to be above £ 1m at the point of death.

Almost 690,000 residential properties in Britain – equivalent to one in 42 homes – are now worth more than £ 1m, according to the property consultancy Savills.

Meanwhile, house prices are continuing to rise; the latest official figures show house prices rose 12.4 per cent in the year to April. This is significant because the threshold at which families start paying inheritance tax is frozen until 2026.

So if house prices continue to rise, an increasing number of families will find themselves liable for inheritance tax.

‘An inheritance economy’

Anne O’Loughlin of the ProVen Estate Planning Service, which specializes in investments that qualify for inheritance tax mitigation, says many younger families are relying on an inheritance payout to help with their family finances – perhaps to ascend the property ladder or reduce their mortgage.

“Financial advisers we work with are reporting an increase in clients concerned about inheritance tax. Due to the turbulent economic conditions, the financial stability and prosperity for much of the younger generation lies with the prospect of inheritance. We are living in an ‘inheritance economy’, ”she says.

One way for wealthier households to pass on more money to their children is to give away more money in their lifetime – perhaps by providing the funds for a deposit to help them get on the housing ladder.

However, if they die within seven years of making the gift, their £ 325,000 inheritance tax allowance will be reduced by an equivalent amount.

Many parents will also not be able to afford to give away sums of money while they are still living in their own home, meaning giving away money is not an option. Some may consider equity release, but there are risks that come with this option.

Where next for inheritance tax? Nothing is likely to change any time soon with Government policy. The only thing that is clear is that more people will likely have to pay the tax over the coming years – whether they agree with it or not.

Find out more here about ways to reduce inheritance tax – from giving money to charity to taking out life insurance.

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