Understand the 2024/25 Inheritance Tax Changes and Protect Your Estate
HMRC set to take in as much as £8.5 billion in Inheritance Tax in the 2024/25 tax year – with Budget amendments yet to come into effect.
Between April and November 2024, HM Revenue and Customs received a total of £5.7 billion from Inheritance Tax (IHT). The figures provided by the Tax Receipts and National Insurance Bulletin indicate an average of £814 million per month: a considerable increase on last year’s takings.
In the equivalent period of 2023, HMRC received £5.1 billion, meaning they are £600 million ahead in IHT collections so far this tax year.
By the end of the 2023/24 tax year, HMRC had received a total of £7.6 billion from estates of the deceased. Following last year’s trajectory, the Revenue could therefore collect as much as £8.5 billion by the end of this tax year, almost £1bn more than the previous.
The HMRC Tax Receipts total from 2023/24 (£7.6 billion) was itself £500 million higher than 2022/23 (£7.1 billion).
Why the exponential increase in Revenue takings?
Some aspects of Inheritance Tax are often labelled a ‘stealth tax’. A stealth tax is an indirect form of taxation, imposed in a way that may be unnoticed or not specifically stated to be a tax.
How may Inheritance Tax be a stealth tax?
The Nil Rate Band (NRB) – the value of estate which can be inherited free of tax – for IHT was set at £325,000 in April 2009 and has remained the same since. For more information on Nil Rate Bands, you can read our article: A Guide To Inheritance Tax & Understanding The Nil-Rate Band.
A contention of ‘stealth tax’ arises because of inflation. That is, £325,000 was worth far more in 2009 than it is today. In fact, the Bank of England states that the value of £325,000 in 2009 is now just over £507,000.
So, if an estate was worth exactly £325,000 and the testator died in 2009, it would be IHT exempt because the entire value remains within the Nil Rate Band. The estate would therefore pass to the beneficiaries in whole.
Suppose that same estate was left entirely unchanged since 2009 and the testator died today, inflation would be such that the estate would now be worth £507,000. However, the Nil Rate Band has not changed. So just £325,000 of the estate would be tax free, leaving £182,000 of taxable estate. With IHT at 40% (save some exceptions) that same estate could be liable for £72,800 to pay in IHT.
Here lies the ‘stealth’. The NRB has not changed, the estate has not changed, yet it is now liable for a considerable amount of Inheritance Tax. Where HMRC would have received nothing, they now could collect over £70,000.
How will the 2024 Budget affect the Revenue’s IHT Receipts?
The 2024 Budget will have implications for IHT from April 2026.
The Government has announced cuts to Agricultural Property Relief and Business Property Relief. Agricultural Property Relief currently provides those inheriting land and ‘character appropriate buildings’ for agricultural purposes with 100% relief from IHT. This means no tax liability at all on an estate’s agricultural value.
The proposed change will provide 100% relief on such property up to the value of £1 million. Values over £1 million will receive 50% relief meaning an effective rate of 20% IHT.
The same applies to Business Property Relief, which also currently provides 100% relief for businesses which are predominantly trading, unquoted trading company shares, and Alternative Investment Market (AIM) stocks.
The proposed change will provide 100% relief on business property values up to £1 million. Relevant business property values over this amount will also attract 50% relief: an effective rate of 20% IHT.
Notably, the Government announced a freeze on the Nil Rate Band until 2030. With continuing inflation, this could see a decrease in the value of your estate that can be passed to your beneficiaries free of tax.
These changes will undoubtedly increase HMRCs takings, with more and more estates breaching the standard NRB, and business and agricultural property exceeding the £1 million tax-free threshold.
Such trends reinforce the importance of proper tax planning and making efficient lifetime gifts, which you can explore here: How Lifetime Gifts Impact Inheritance Tax: Key Tips & Allowances.
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