Inheritance tax receipts hit record high

• Total IHT bill for this year on track to hit £7.9 billion
• Late payment interest charge at 7.5% spurring more to pay quickly
• Frozen bands will cost couples £170,000 by 2028

Laura Suter, head of personal finance at AJ Bell, comments on the latest figures on the government’s inheritance tax take:

“The amount the nation paid in inheritance tax last month is the highest on record, with the government getting £795 million in death taxes in June. The combination of rising house prices, rising investment markets and frozen tax-free bands mean that more and more estates are paying inheritance tax.

“While the government acknowledges that a few very large estates have skewed the payments for both this June and last June, receipts are still almost £1 billion more in the past twelve months when compared to the previous twelve months. In the first three months of this tax year the amount the nation has paid in inheritance tax is 11% higher than the same three months last year. If this trend continues the total IHT bill for this tax year will top £7.9 billion – far ahead of OBR expectations of £7.2 billion.

“Successive governments have chosen to freeze the nil rate band, dragging more people into the death tax net. Based on AJ Bell analysis, a couple would pay no IHT on assets up to £1.43 million by 2028 if the nil rate band, and residence nil rate band introduced in 2017, had been uprated by successive Tory chancellors going back to George Osborne. The policy of freezing IHT thresholds since 2010 could cost families an extra £170,000 in death duties*.

“Currently, only one in 25 estates pay IHT, but that will rise during the time the thresholds are frozen. Increasingly this impacts the moderately wealthy – as those with large estates are covered by other thresholds and allowances and can afford professional help to minimise their bill.”

Higher rates sparking quick payments

“Higher interest rates might be spurring more people to settle inheritance tax bills quicker. The government charges a penalty of 2.5 percentage points above Base Rate for any late payment of tax bills. Since Base Rate has shot up taxpayers now face a 7.5% interest rate on any late payments. Considering some estates have hefty tax bills, this penalty can really add up.

“Based on a previous FOI by AJ Bell, we know that more than 1.4 million taxpayers were charged interest by HMRC for late payment of tax in the 2020-21 tax year. As the tax system has become more complicated, we’ve seen more people miss tax payments and incur fees. But now the interest charge has shot up from 3% at the start of last year to 7.5% today, people will face bigger penalties for missing the deadline.”

*IHT at 40% equates to £172,000 on a sum of £430,000.

Source: AJ Bell. IHT nil rate band uprated 2010/11-2027/28 in line with the previous year’s inflation. Residence nil rate band uprated from April 2021, having been set at £175,000 from 2020. CPI used until 2021, after which the latest OBR inflation projection is assumed. Figures rounded to the nearest £1,000.