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Inheritance tax (IHT) is levied on the value of a person’s estate at the time of their death. The tax is charged at 40% above the tax-free threshold, which is £325,000 for 2018/19.[1]  Receipts from the tax are forecast to be £5.3 billion in 2018/19.[2] It is estimated that the tax was paid on 21,000 estates at death in 2017/18, representing under 4% of all deaths.[3]

When calculating the taxable value of a person’s estate, transfers made out of someone’s estate within seven years of their death are included. There are some gifts which one can make in the last seven years of one’s life which do not attract tax. In addition certain gifts are exempt from tax irrespective of their size, and irrespective of whether they are made during one’s life, or made under the terms of one’s will.

From the late 1990s there was a steady growth in the receipts from IHT and the numbers of estates liable to pay it, strongly linked with the growth in house prices.  By the middle years of the decade commentators were predicting that very many more families would have to make provision to pay for the tax in future, though even at this point, at the peak of the UK housing market, tax was paid on around 6% of all estates at death.  In 2007 the Labour Government responded to these concerns by introducing a new transferable allowance for spouses and civil partners.  The cost of the new relief was considerable – about £1 billion in 2008/09 – though less than the Conservative Opposition’s proposal for a new £1m tax-free threshold which, at the time, was estimated to cost £3.1 billion.  By comparison, total receipts from the tax in 2007/08 were £3.8 billion.[4]

Subsequently receipts from this tax dropped quite sharply, with the onset of the recession and the associated slump in house prices.  In addition public debate about the tax system moved on, with relatively little attention being paid to IHT.

In its agreement published after the election, the Conservative-Liberal Democrat Coalition Government made a number of tax proposals including a ‘substantial’ increase in the income tax personal allowance from April 2011. The agreement went on to state that the new Government would “further increase the personal allowance to £10,000, making real terms steps each year towards meeting this as a longer-term policy objective”, and that it would “prioritise this over other tax cuts, including cuts to Inheritance Tax.”[5] The new Government’s first Budget in June 2010 did not contain any proposals for reforming IHT, and over the five year Parliament the tax was left largely unchanged. In its 2011 Budget the Government announced that the tax-free threshold would be frozen at £325,000 until April 2015,[6] and in the 2013 Budget it confirmed that the threshold would remain frozen at this level until April 2018.[7]

Over this period annual receipts slowly grew, with the recovery in the economy and growth in house prices, which in turn lead to more interest in the tax and debate as to its possible reform.[8] In its manifesto for the 2015 General Election the Conservative Party stated that in government, “we will take the family home out of tax for all but the richest by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million, with a new transferable main residence allowance of £175,000 per person.”[9] In the Conservative Government’s first Budget on 8 July, the then Chancellor George Osborne announced that from April 2017 an additional nil-rate band would apply on transfers on death of a main residence to a direct descendant.[10] In this context a direct descendant is “a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.” Initially the band would be set at £100,000.  The ‘main residence nil-rate band’ would be subject to a taper, for any estate with a net value of more than £2m; the band would be withdrawn by £1 for every £2 the estate exceeded this threshold. If someone downsized or ceased to own a home before they died, the additional nil-rate band could still be claimed on assets of an equivalent value, if passed on death to direct descendants. This provision applies if someone has downsized or ceased to own a home on or after 8 July 2015.[11]

In his Budget Mr Osborne also announced that the existing nil-rate band would be frozen at £325,000 at least until 2020/21, while the main residence nil-rate band would rise by £25,000 each year, to reach £175,000 in 2020/21. As with the existing nil-rate band, any unused fraction of the main residence nil-rate band may be transferred to a surviving spouse or civil partner.  The Budget report noted that, given this, “the effective inheritance tax threshold will rise to £1m in 2020/21.”[12]

Provision to introduce the new nil-rate main residence allowance from April 2017, and to increase it over 2017/18 to 2020/21, was made by ss9-10 of the Finance (No.2) Act 2015.[13] The annual Exchequer cost of the new main residence nil-rate band was forecast to rise from £265m in 2017/18 to £725m by 2021/22.[14] No other major reforms have been made to IHT since then.

In January 2018 the Chancellor, Philip Hammond, commissioned the Office of Tax Simplification to carry out a review of the IHT regime.[15] The OTS published a call for evidence in April,[16] and a first report in November which summarised the many comments and submissions the OTS had received and made a series of recommendations on administrative issues.[17] The OTS published its second report making proposals to simplify the design on IHT on 5 July 2019.[18] In a letter to the OTS on the report’s publication the Chancellor Philip Hammond said that the “the Government will consider the recommendations made in the report and will respond in due course.”[19]

Notes :

[1]     Tax rates and allowances for 2019/20 are set out in Annex A to HM Treasury, Overview of Tax Legislation and Rates, October 2018.

[2]     OBR, Economic & Fiscal Outlook, CP 50, March 2019 (Table 4.3).

[3]     HMRC, Statistics: Numbers of taxpayers and registered traders, May 2019; ONS, Vital Statistics: Population and Health Reference Tables, November 2018.

[4]     Pre-Budget Report, Cm 7227 October 2007 p164; HC Deb 23 April 2007 c987W; HM Revenue & Customs, HMRC Tax and NICs statistics, March 2018

[5]     HM Government, The Coalition: our programme for government, 20 May 2010 p30. See also, Income tax : increases in the personal allowance since 2010, Commons Briefing Paper CBP6569, 15 November 2018.

[6]     Budget 2011, HC 836 March 2011 para 2.58

[7]     Budget 2013, HC 1033 March 2013 para 2.76

[8]     For example, “Death to the death tax?”, IFS Observations, Institute for Fiscal Studies, 4 April 2014; “House prices to push up death duty”, Financial Times, 16 August 2014;

[9]     The Conservative Party Manifesto, April 2015 p67

[10]    HC Deb 8 July 2015 cc330-1; Budget 2015, HC264, Jul 2015 paras 1.217-221

[11]    For details see, HM Revenue & Customs, Inheritance tax: main residence nil-rate band and the existing nil-rate band: tax information & impact note, 8 July 2015

[12]    Summer Budget 2015, HC246, July 2015 para 1.219

[13]    Provision with regard to the new nil-rate band where someone has downsized their home was included in Finance Act 2016 (specifically section 93 & schedule 15).

[14]    Spring Budget 2017, HC 1025, March 2017 p30 (Table 2.2 – item be).

[15]    OTS press notice, Chancellor requests OTS review of Inheritance Tax, 29 January 2018

[16]    OTS, Inheritance Tax Review Call for evidence and Survey – consultation, 27 April 2018

[17]    OTS, Inheritance Tax Review – first report: Overview of the tax and dealing with administration, November 2018

[18]    OTS, Inheritance Tax Review – second report: Simplifying the design of Inheritance Tax, July 2019

[19]    Letter from the Chancellor of the Exchequer to the OTS, 4 July 2019

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