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Inheritance tax receipts fall for first time in a decade

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The government’s haul from inheritance tax receipts fell for the first time in 10 years as a higher tax-free rate on estates was introduced.

Inheritance tax (IHT) receipts for the 2019/20 tax year came in at £5.2bn, down £223m from the previous tax year.

This is the first time since 2009/10 that IHT receipts have decreased. The data from HMRC also revealed there is a reversal of the longer-term trend of UK deaths resulting in an IHT charge.

The introduction of the main Residence Nil-Rate Band (RNRB) tax-free threshold in April 2017 is cited as a cause for the decrease, which is particularly felt in 2019/20 due to the time lag between the tax charge being created and it being paid.

While the current IHT nil-rate band is £325,000, married couples and civil partners can pass on £650,000, doubling the amount that can be left by surviving spouses. But spouses also get an extra allowance – the RNRB – currently £175,000 each which means a joint estate of up to £1m can be passed on IHT-free to a direct descendant.

In 2017/18 there were 24,200 deaths resulting in an IHT charge (3.9% of 620,000 UK deaths), a decrease of 3,900 (14%) since 2016/17. And in 2017/18, HMRC revealed that 20,200 estates used the RNRB threshold, resulting in £3.1bn of chargeable estates being sheltered from the tax.

HMRC said prior to 2017/18, the proportion of estates hit by the tax charge had been increasing; growing by 0.3 percentage points a year on average.

The data also revealed that 2,250 estates benefited from the reduced 36% IHT rate where at least 10% of the value of the estate is left to charity. This resulted in a tax saving of £40m, up from the £36m reported in the previous tax year.

Clare Moffat, head of intermediary development and technical at Royal London, said while the decline is not unexpected, the RNRB provisions don’t apply to everyone.

“If you are a cohabiting couple this will not apply to you. In addition the RNRB can only be used for direct descendants.  This means that if you are single, have no children and your property is passing to a nephew that might be your full-time carer, then your estate would only be able to claim the Nil Rand Band of £325,000. Careful estate planning is vital to avoid nasty shocks and potential huge tax bills,” she said.

Tom Selby, senior analyst at AJ Bell, said the RNRB was announced with “huge fanfare” by former chancellor George Osborne but given the effect of coronavirus, it may come under scrutiny.

Selby said. “It would be no surprise to see Osborne’s big IHT giveaway come under the microscope as his successor, Rishi Sunak, seeks ways to raise much-needed cash to pay for the nation’s eye watering Covid-19 debts.”

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