HM Revenue & Customs revealed in its latest financial report that inheritance tax had risen once again.
The report showed that HMRC IHT receipts for April to May 2023 were £1.2bn, which is £0.1bn higher than in the same period a year earlier.
This follows the record-breaking £7.1bn that was raised by IHT receipts in the 2022-23 tax year, suggesting the possibility of yet another record-breaking tax year to come.
HMRC’s reports have revealed a 14 per cent and 17 per cent increase in the past two years, respectively, for IHT receipts.
The total IHT receipts are growing by nearly £1bn each year as an increasing number of people are falling into the ever-widening IHT net.
Planning solutions
There are many IHT planning solutions that can be employed, from outright gifts to family and friends, to more complex planning using trusts.
Life policies are also a valuable tool in IHT planning, both to cover the potential tax on gifts for up to seven years and for the remaining estate.
IHT example
Where a gift is made to a trust or an individual, it will normally be included in the IHT calculations for the donor’s estate for seven years.
Whether any tax is due on the gift will depend on whether it falls within the nil-rate band or not. To establish this, any gifts are considered in a strict date order, and they also form the first slice of the donor’s estate.
For example, John makes a gift on January 1 2017 to Susan of £200,000, and a second gift of £200,000 a day later to Heather on January 2 2017.
The residual estate, which does not include a qualifying residential interest, is valued at £400,000 on John’s death on August 1 2022 and there is no transferrable nil-rate band available.
So, what would the position be?
The gift to Susan can use the annual exemption of £3,000 for the year the gift was made (2016-17) and the previous year (2015-16) if John had made no other gifts in these tax years. The gift is also fully within the nil-rate tax band and will not be subject to any IHT.
There is no annual exemption available for the gift to Heather since it is within the same tax year as the gift to Susan, and £131,000 falls within the nil-rate tax band, while the remaining £69,000 will to be subject to IHT at 40 per cent.
There is no nil-rate band available for the residual estate, which will also be liable to IHT at 40 per cent.
The responsibility for the tax liability on the gift falls on to Heather. In calculating her liability, however, she can use taper relief.
The gift was made five years and eight months prior to John’s death, and this means that taper relief of 60 per cent is available.
