HMRC has reported that Inheritance Tax (IHT) receipts for the tax year 2020/21 were £5.3bn. This is an increase of £200m from the previous tax year. The IHT Nil Rate Band is currently £325,000 per person and the Residence Nil Rate Band is £175,000 per person (where an estate meets the qualifying criteria). It is not known when or if these bands will be increased in the future. The effect of “fiscal drag” means that as assets increase in value over time (property prices, in particular which have gone up approximately 10% in the last 12 months in some areas), a greater proportion of a person’s estate will be exposed to IHT at the current rate of 40%.
IHT is not one of the largest sources of tax revenue but is increasing year on year. In particular, there were unusually high receipts in October-November 2020 and March 2021. Anecdotally, this is believed to be due to families transferring wealth to children and grandchildren in response to the COVID-19 pandemic.
IHT and wider estate planning are not something that should be rushed as careful decisions need to be made. When considering whether to make lifetime gifts and how much to give, both the circumstances of the donor and the recipient need to be thought through, and the effect for both IHT and Capital Gains Tax. Charges for both taxes can be triggered by a lifetime gift. The other factor of IHT planning is that normally gifting will only be effective if the donor survives the gift by 7 years. The sooner the planning is started the more likely that period will be achieved.
If you would like to discuss any aspect of your estate planning please get in touch with Edward Porter or your usual Michelmores contact.