Increased taxation is likely to be on the agenda
The ‘better off’ have to be the target for any tax rises
Inheritance tax only affects approximately 4% of the population
Increasing IHT may not affect the core support for Labour
OVERVIEW
With the advent of a new Labour government several clients have expressed a concern about the potential for an increase in taxation. Whilst staying politically neutral (as best I can) this is one area that the Labour party might look at to raise additional revenue for their social and economic priorities.
In a recent survey conducted by Hargreaves Lansdown it was clear that IHT was the most hated taxes of all (possibly a reflection of the demographic of people who do have money to invest). I thought that I would share some statistics with you and try to put the amount of revenue raised, etc, into some context.
PERSONAL WEALTH IN THE UK
This graph immediately suggests that only the wealthiest 20% of the UK population will fall into IHT. This is overly simplistic of course and not 100% right but a reasonable starting point.
A couple with children could benefit from allowances meaning that £1m is free of inheritance tax and for an individual it would be half of this – £500,000. Without children the Residence Nil Rate Band doesn’t apply tapered for estates over £2m.1
TYPICAL WEALTH BY DECILE (PER HOUSEHOLD)
Average total wealth for the typical household by decile (e.g. average total wealth in the top 10%, bottom 10%, and each decile in between)
TOTAL TAX RECEIPTS IN THE UK FROM 2000/01-2023/24 ALL TAXES (BILLIONS)
Clearly total UK receipts from all sources are now closing in on £830 billion.
EXPECTED TAX RECEIPTS 2024/25
Income tax is by far the largest source of tax revenue in the UK, with VAT hot on its heel. IHT doesn’t even feature in the top ten (nine shown). It is expected that the total tax revenue will exceed £1,000 billion for the first time.
INCREASES IN TAX
The Office for National Statistics has reported that inflation will add approximately £8 billion per year to the exchequer and in an article in the Financial Times it is predicted that the number of UK taxpayers to pay the highest rate of income tax (45%) will top one million for the first time.
Of those 1 million paying 40% will rise to above 6.3 million out of approximately 31.7 million working adults.2
TOTAL OF IHT LIABILITIES IN THE UK – NOW NEARLY £6 BILLION
Last year, IHT raised just £6.4 billion – less than both tobacco duty (£9 billion) and alcohol duty (£12 billion).
IHT is well under 1% of all UK taxes – hardly a significant amount of money relative to other taxes but impactful for those who pay it.
In more recent years, there has been an increase in IHT receipts however, even with this being the case, in comparison to other taxes, for example, income tax, national insurance, capital gains tax, corporation tax and VAT, IHT does not currently raise significant amounts for the government.
The reason for the general increase in receipts, is fiscal drag. The IHT tax threshold (or nil rate band) has been held at £325,000 since the 2009/2010 tax year, while asset prices, notably house prices have continued to rise. This has dragged more and more people into the IHT net.
NUMBER OF TAXPAYING ESTATES & THE PROPORTION OF UK DEATHS RESULTING IN IHT
It is worth noting that households where one spouse leaves the entire estate to another spouse does not give rise to inheritance tax (this includes civil partnerships).
So, under 4% of all UK estates pay any Inheritance tax at all. Increasing IHT will affect a relatively small number of people.
WHAT ASSETS TYPICALLY MAKE UP AN ESTATE
This graph ignores Pensions as they are currently free from any inheritance tax but more on this in another communication.
Pensions are clearly a target for the new Government and we will have to wait and see if there is an appetite to bring pensions back into inheritance tax.
If you would like to discuss any issues raised in this communication please contact NBL and we can talk to you about potential solutions and ideas that can mitigate the impact of IHT.
