Inheritance Tax: Britons 'most hated tax' hits families as HMRC receipts rise by £700m

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HMRC released data recently which showed £3.1billion was paid by families through Inheritance Tax (IHT) between April and September, an increase of £700million on the same period in 2020. Unfortunately, IHT may become even more costly for families in the coming months as Rishi Suank eyes up his options ahead of the coming Budget.

Julia Rosenbloom, tax partner at Smith & Williamson, warned IHT raises and further tax raids could be on the horizon.

“The Government continues to need to raise funds to pay for the costs of COVID-19 support schemes as well as reform commitments in other areas such as health and social care, while also dealing with the challenges posed by soaring energy costs,” she said.

“Ahead of next week’s Budget, Chancellor Rishi Sunak will therefore be looking closely at all possible areas he can tap for additional revenue, not least from personal taxes such as IHT which have shown yet another uplift, to boost the Treasury’s spending power.”

Ms Rosenbloom warned precedents set by the Prime Minister may make further tax hikes more probable than many would assume.

She continued: “Prime minister Boris Johnson’s recent announcement introducing a new health and social care levy, which broke a manifesto commitment, demonstrates that the Government is not afraid of tax rises. Whether any reforms to taxes are announced next week or at a later date, the outlook as to how individuals and businesses will be taxed in the coming years is far from certain.

Inheritance Tax: Britons 'most hated tax' hits families as HMRC receipts rise by £700m
© GETTY HMRC

“There have been a number of reports published by the likes of the Office of Tax Simplification as well as an All-Party Parliamentary Group on how IHT could be reformed, which present the Chancellor with plenty of possible options for change. Areas of focus in the studies have included the rules on lifetime gifts, the exemptions, and the CGT-free uplift on death.

“Given the uncertain outlook for taxes, I’d encourage people to start thinking about their tax planning sooner rather than later and make the most of current allowances before any changes are introduced. Investing tax-efficiently and considering options such as gifting could ensure that more of your assets are passed on to family members or charitable causes.”

Increases to IHT will be particularly difficult to stomach for many Britons as recent research from Hargreaves Lansdown highlighted what the UK’s most hated taxes are. In September, the company surveyed 2,000 Britons and the results showed the most hated tax in the UK is IHT, named by one in four people (24 percent).

Tax on income took second place, including income tax and national insurance, at 17 percent , while third place was jointly held by tax on spending (15 percent) and tax on investments (15 percent).

Additionally, one in 10 said their most hated taxes were the so-called “sin” taxes on items like alcohol, tobacco, fuel and sugar.

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Sarah Coles, a personal finance analyst, at Hargreaves Lansdown, commented on the results.

“Nobody actively enjoys paying tax, but while we’re prepared to accept some as a fact of life, others inspire deep and abiding hatred among millions of us,” she said.

“As the Chancellor weighs up potential tax changes in the budget, details of the UK’s most hated taxes show just how unpopular a rise would be to many of them.”

Ms Coles went on to note that while IHT is an unpopular tax, it is nevertheless one in which most people will not pay.

Briton’s hatred of IHT “belies the fact” that in reality, only four percent of people pay it, according to analysis from Hargreaves Lansdown. It was also highlighted that of the £334.3billion taken in tax between April and September this year, just £3.1billion of it was IHT.

Inheritance Tax: Britons 'most hated tax' hits families as HMRC receipts rise by £700m
© EXPRESS Budget

Ms Coles continued: “Rather than being a specific irritation with how it affects us, in many cases it’s more of an ideological resentment. People don’t like to think of money they’ve already paid tax on being taxed again, and they want their loved ones to benefit from their legacy rather than the taxman.”

Ms Coles concluded by examining how people can reduce their IHT costs should they find themselves hit by the tax.

“If IHT worries you, you can avoid paying more than your fair share by giving your family gifts during your lifetime rather than leaving it all in your will,” she said.

Not only does it have tax benefits, it also means you get to see them enjoy their gifts while you’re still around.

“You get a gift allowance of £3,000 each year that falls out of your estate immediately for inheritance tax purposes. You can also give small gifts of up to £250, specific gifts for family weddings and unlimited regular gifts from income.

“Outside the gifting allowances, you can make gifts of any size (known as potentially exempt transfers) and as long as you live for at least seven years after handing it over, it falls outside of your estate for inheritance tax purposes. If you die before the seven years are up, and your estate is subject to IHT, you will have to pay tax on some of this.”

Under the current rules, IHT is only levied on the estate of someone who has died and is passing on their assets, so long as their total estate is valued over £325,000.

Where IHT is charged, it is levied at 40 percent.

While it is possible to reduce what is paid, Money Helper, the public advisory service, notes it is a complicated area to manage and as such, professional guidance is usually advised.

However, “in short”, a person can reduce how much IHT is paid by:

  • Leaving a legacy to charity
  • Putting your assets into a trust for your heirs
  • Leaving your estate to your spouse or civil partner
  • Paying into a pension instead of a savings account
  • Regularly giving away up to £3,000 a year in gifts.
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