Today’s inheritance tax dates to 1894, when the British government first introduced estate duty, a levy on land’s capital value, to raise funds to pay off a government deficit of around £4 million.
The new incarnation of inheritance tax replaced many individual inheritance taxes. These included the 1796 taxation of estates that was brought in to assist in funding the fight against Napoleon. However, the earliest instance of a death duty can be tracked to 1694. In that year, a tax on property listed in wills and proved in court called probate duty was established.
When inheritance tax was first introduced in the UK, it was designed to only impact the wealthiest members of society. However, since the rise in residential property value, especially in England’s southeast, many more families have classified for inheritance tax bills in recent decades.
in 1993, inheritance tax raised just over £1 billion, rising to almost £4 billion in 2008 as house prices rocketed. following the financial crash and measures that permitted civil partnerships and to share inheritance tax allowances, receipts reduced to £2.4 billion by 2010. however, ever since, they have been steadily growing. last year, in 2021, receipts collected by her majesty’s revenue and customs (hmrc) reached £5.6 billion.
Currently, inheritance tax is paid on an individual’s estate when it has a worth greater than £325,000 at the time of their death. inheritance tax is charged at a rate of 40 per cent on any value beyond this threshold. The rate of taxation may be reduced further to 26 per cent in case when 10 per cent or more of an individual’s estate is left to charity.
In this article, we’ll take a closer look at some of the most significant changes to inheritance tax over the years, including the latest proposal to amend the levy. Read on to learn more.
Gift giving to offset tax
From the year 1896, it became possible to sidestep estate duty by passing on gifts during a donor’s lifetime. To stop tax avoidance using last-minute transfers, any gifts handed over on a limited time prior to death remained subject to the levy. Initially, this period was a single year, however it rose to become seven years. The year 1975 saw estate duty replaced by capital transfer tax. This tax now encompassed all money and gifts transferred over a specific level, but the potential for exclusion was reintroduced to inheritance tax in 1986.
Gifts given more than seven years before a person’s death don’t incur tax, and the exclusion slowly reduces. As a result, gifts that are given less than three years prior to death will incur 100 per cent tax. Specific gifts, like those from grandparents of sums up to £2,500 and gifts from parents upon marriage of up to £5,000, are entirely exempt from inheritance tax.
Due to the way that UK legislation works, financial experts can help their clients to reduce the size of their inheritance tax bills by transferring money to their descendants in the form of gifts.
Sharing inheritance tax allowances
In 2007, the UK Treasury announced that inheritance tax allowances (sometimes known as the nil-rate band) would, with immediate effect, be transferable between civil partners and married couples. As a result, for the 2007-8 tax year, a couple who were married could enjoy an allowance of £600,000 before paying inheritance tax, whilst those who were single retained the allowance of £300,000. The enhanced allowance works in a way that when the spouse or partner dies, the nil-rate band of the second spouse or partner rises by the percentage of any nil-rate band left unused when the first spouse or partner dies.
This amendment was additionally extended to existing widowers, widows and bereaved partners in the same year. If their late partner or spouse has not used their total Inheritance tax allowance at the time of death, then any unused percentage of the allowance can be added to the now single person’s allowance at the point when the surviving partner or spouse dies. This rule applies irrespective of the dedicated date when the first spouse or partner died; however, specific rules apply in cases where the surviving spouse decides to remarry.
Additional tax-free allowances introduced
In 2015, a new measure was defined that was designed to reduce the amount of inheritance tax owed for some estates by offering additional tax-free allowances in instances where the family home was being passed on to direct descendants. This measure is known as the Residence Nil-Rate Band (RNRB), and it came into effect under the Finance (No. 2) Act 2015. It included the following scheduled amounts:
- For the tax year 2017-18 – £100,000
- For the tax year 2018-19 – £125,000
- For the tax year 2019-20 – £150,000
- For the tax year 2020-21 – £175,000.
For following tax years, the amount is linked to the September-to-September rise of the consumer price index
The Finance Act of 2016 offered further relief in situations where part or all the additional band would be lost, where an individual had downsized to a residence of less value or had stopped owning a home after 8 July 2015. This, however, is conditional on the deceased leaving the smaller residence, or assorted assets of equivalent value, to their direct descendants. Such inheritors are defined as being lineal descendants, civil partners or spouses of lineal descendants, or former civil partners or spouses who have not remarried or entered a new civil partnership.
The RNRB’s introduction effectively means that a couple who are married leaving a home to direct descendants can now leave up to £1 million tax free between them. However, this allowance diminishes when estates are valued to be worth over £2 million.
Alterations to inheritance tax accounting and reporting
The latest measure in 2022 proposed for inheritance tax widens the circumstances when full inheritance tax accounts aren’t required to be submitted to HMRC regarding estates where a deceased individual was domiciled in the United Kingdom, and reduces the basic information that is instead reported. For exempt and low-value excepted estates, the information required instead of an inheritance tax account is now simplified, and the monetary limits are now increased as following.
The limit for the aggregate on exempt ‘normal out of income’ type transfers and chargeable transfers made prior to passing away has risen from £150,000 up to £250,000, and the limit now for chargeable trust property has also risen from £150,000 up to £250,000. Additionally, for exempt estates, the limit in relation to an estate’s gross value has now risen from £1 million, with it increasing to £3 million. The total amount of trust property, which includes the exempt amounts, are capped at £1 million.
The definition of the ‘inheritance tax threshold’ has been revised, and it now reflects the inheritance tax nil-rate band multiplier in cases where less than 100 per cent of any unused inheritance tax nil-rate band is being transferred to an individual who is deceased. Finally, the time period for the UK Court Services to send HMRC information instead of an inheritance tax account is extended from one week to one month.
Do you need expert advice on inheritance tax?
If you have concerns or questions regarding inheritance tax and require retirement planning specialists in Chester and Shropshire, we can help. Contact our team at Hartey Wealth Management for any assistance required.