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Fiscal drag leads to higher inheritance tax bills

Fiscal drag leads to higher inheritance tax bills

HM Treasury has seen an increase in inheritance tax receipts during the financial year to date, underlining the importance of effective tax planning.

For April 2022 to January 2023, HM Revenue and Customs (HMRC) is reporting a 15% increase in inheritance tax receipts compared to the previous year, a total of £5.9 billion.

It means the Treasury has received an additional £0.9 billion in tax receipts from inherited estates compared to a year earlier.

For the last full financial year, 2021/22, the total inheritance tax take was £6.1 billion, placing the current financial year to date close to that total figure.

Higher inheritance tax receipts will boost the Treasury’s tax take when the Chancellor needs to consider options to stimulate the economy and increase public sector pay to avert further industrial action.

The independent Office for Budget Responsibility (OBR) forecasts inheritance tax receipts of £6.7 billion during this financial year, rising to £6.8 billion next year.

A frozen inheritance tax nil-rate band and rising property prices have inflated inheritance tax bills in recent years, and that trend looks set to continue.

The nil-rate band for inheritance tax is frozen at £325,000 until 2027/28, with rising asset values driven by soaring price inflation resulting in higher tax bills for families when their loved ones die.

Freezing the threshold at which inheritance tax is paid is likely to continue generating more tax revenue each year for the government, a process known as fiscal drag.

For families across the UK, the figures should serve as a prompt to consider the value of your taxable estate and consider any relevant tax planning measures.

Inheritance tax is paid at a rate of 40% on taxable assets above the nil-rate band, leading to the tax being paid by around one in every 25 estates.

Families can reduce future inheritance tax bills by making full use of their gifting allowances, leaving money to a charity in a will, or excluding assets from estates with a trust or pension.

Inheritance Tax can be complex but careful planning, with an experienced and qualified financial planner can reduce the amount of tax payable and ensure you are able to live the life that’s important to you.

If you wish to discuss your inheritance or legacy planning, please contact a member of our team.