£5.2 Billion in Inheritance Tax Paid this Year

In the 2017-18 tax year, families in the UK paid a record amount of £5.2 billion in inheritance tax (IHT), according to official statistics. This is a £400 million increase from the previous year, despite the introduction of a new “family home allowance” which allows couples to pass on £850,000 tax-free.

The increase in IHT collections can be attributed to rising stock markets and property prices, which have exceeded the current IHT-free threshold. However, the introduction of the family home allowance has provided some relief, as it allows individuals to pass on additional tax-free amounts when their main residence is directly passed on to children or grandchildren.

The estate tax allowance, which determines the amount that can be passed on IHT-free, has been stuck at £325,000 per person since 2009. In April 2016, a new additional allowance of £100,000 was introduced for when a family home is directly inherited by children or grandchildren. This “residence nil-rate band” is in addition to the normal allowance and will increase incrementally each April, reaching £175,000 per person by April 2020. Thus, by that time, a couple will be able to pass on a total of £1 million without paying inheritance tax.

Taking advantage of this allowance can lead to significant tax savings. For example, if an individual died in the 2017-18 tax year with an estate worth £425,000, including a main residence, they would have to pay inheritance tax at 40% on the £100,000 exceeding the normal allowance. However, if they used the £100,000 allowance, it would save them £40,000 in taxes.

It is important to note that the additional allowance for passing on a home is automatically included, even if a claim is not made. The tax office has confirmed that estates entitled to the allowance will benefit from it, and anyone who has inadvertently missed out on claiming it can claim back any overpaid inheritance tax.

In January, it was revealed that the UK government plans to review and overhaul the inheritance tax system. The Office for Tax Simplification is conducting a review that includes examining the “gifting” rules, the submission process, and other complex areas within the system.

The family home allowance, which was introduced by former chancellor George Osborne, has become one of the most intricate aspects of the tax law. In order to qualify for this allowance, the property must be directly passed on to “direct descendants”. Additionally, the additional allowance gradually reduces when the value of an entire estate exceeds £2 million.

Conclusion:
The record-breaking £5.2 billion inheritance tax collection in the 2017-18 tax year highlights the need for individuals and families to carefully consider their tax planning strategies, particularly regarding the family home allowance. Although the allowance provides additional tax relief, understanding the intricacies of the tax law and ensuring that the allowance is utilized correctly is essential in order to avoid unnecessary tax burdens. As the UK government continues to review and potentially overhaul the inheritance tax system, individuals should stay informed and consult with tax professionals to make the most of available tax-saving opportunities.