Inheritance tax: It is no longer a tax for the wealthy...

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HMRC rakes in an extra £700m in inheritance tax as property prices surge



The Government saw a £700million spike in inheritance tax receipts between April 2021 and January 2022, with the rise being attributed to rampant property price inflation.

New HMRC data shows that £5billion was collected during that period, a £700million - or 14 per cent - increase compared to the same period a year earlier.

Experts also warned that IHT was no longer just a tax on 'wealthy individuals' and that, thanks to the threshold being frozen, many more people could find themselves with a hefty bill if they receive property or other assets from someone who has died.

Shaun Moore, tax and financial planning expert at wealth management firm Quilter, said: 'Sustained property price growth and asset price inflation has pushed up the value of estates, meaning higher IHT receipts for the government.

'IHT was once viewed as a tax on wealthier individuals, but the reality is that the average UK property is only £50,288 short of the standard nil-rate band.

'With the NRB frozen until 2026 and house prices still on the up, many more people could face a hefty IHT bill.'

The average property price was £275,000 in December - £27,000 higher than in the same month a year earlier, according to latest figures from the Land Registry.

The nil-rate band under which estates are not liable for the IHT usually rises with inflation, but in the 2021 Budget it was frozen at £325,000 until at least April 2026.

This means that, while property prices are rising rapidly, the value of property or assets someone can pass on after they have died tax-free will not.

Inheritance tax is charged at 40 per cent on assets passed on after a person's death.

This could include their home, savings or investments, for example.

Everyone can leave up to £325,000 in cash or assets tax-free, and they also get an additional £175,000 allowance on their home if they are leaving it to their children.

Julia Rosenbloom, tax partner at financial services firm Smith & Williamson, said: 'The Chancellor's next Budget could bring in changes to personal taxes that may affect the feasibility of families passing wealth to the next generation and, accordingly, the level of IHT payable.

'It's important for families to think carefully about their tax planning and take professional advice to ensure they use their current allowances before any possible changes are introduced.

'Even if no direct changes are made to IHT in the next Budget, many families can still expect to see increased IHT bills in the coming years given both the nil rate band and residence nil rate band have been frozen until at least April 2026.

'This is bringing more estates into scope on the back of rising property values in particular.'

Recent research from insurer NFU Mutual found that just 18 per cent of people in Britain think it IHT is fair.

More than half (57 per cent) thought it was unfair, while a quarter of people did not know.

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Investors flock to risky shares – to pay no inheritance tax



The amount of money flowing into inheritance tax-free stocks has quadrupled, as thousands more families face being caught by divisive death duties.

Almost £20m in new money has been invested into the Alternative Investment Market so far this year at the Wealth Club, a broker, up from £5m invested the prior year.

A number of shares listed on the market, a sub-market of the London Stock Exchange designed for smaller firms, benefit from full exemption from IHT. The number of people investing in portfolios made up exclusively of Aim shares that are exempt from the 40pc levy has more than doubled, the broker said.

It said the average age of investors with “Aim IHT portfolios” was 76, with the typical amount invested around £60,000.

The rise comes alongside a five-year freeze in tax breaks announced at the 2021 Budget. Locking the main £325,000 tax-free amount will catch thousands more families, as property prices and stock markets rise but the threshold remains the same. More than 36,000 estates a year are expected to pay the death duty by 2026, up from fewer than 25,000 in recent years, according to official forecasts.

It will cost families an extra £1bn and result in total receipts from the death tax soaring to an all-time high of £6.6bn by 2026.

The threshold has not risen since 2009. It would stand at more than £460,000 today had it risen with inflation each year since then.

Alex Davies, of the Wealth Club, said more people were looking to cut their bills and take advantage of legal reliefs to avoid paying more.

“With inheritance tax thresholds frozen until 2026, the amount families lose to IHT is only going one way and that is up,” he said.

Of particular concern is money that has built up in Isas over the years, which will be subject to the duty on death. Unlike pensions, which are exempt from the death tax, Isas – which protect savers from all other types of taxation – are not.

However, by filling an Isa with Aim shares that qualify for tax relief, families can shield the money they have accrued through years of diligent saving.

“Many of these stocks will qualify for something called Business Property Relief, which was introduced initially to help family businesses to be passed through the generations and has since been extended,” Mr Davies said. “If you hold these stocks in your Isa and do so on death, provided you have held them for at least two years, then they should be inheritance-tax free.”

Married couples can pass on up to £1m tax free by combining their £325,000 IHT allowances, plus their “family home allowance” of £175,000 each – an extra tax break for those leaving the family home to a direct descendent. Anything more than this will be taxed at 40pc.

A couple paying £20,000 a year each into a portfolio of Aim shares using their annual Isa allowance would have a 100pc tax-free pot of more than £1.5m after 20 years, assuming a 1.25pc yearly management charge and 7pc annual investment growth.

IHT-free Aim shares favoured by Questor, the Telegraph’s stock-picking column, include Naked Wines, the alcohol retailers; Boohoo, the online fashion website; and wealth advice firm Brooks Macdonald.

Aim companies tend to be smaller, making them a riskier investment. When markets crashed at the start of the pandemic, the FTSE 100 index of Britain’s biggest firms fell by a third, while the Aim market fell close to 40pc, although both have since recovered well.

However, a number of firms have stayed on the junior market despite growing in size. There are around 30 companies valued at £1bn listed on the Aim market today.

To avoid the risk of putting all your eggs in one basket, Mr Davies suggested investing in a ready-made portfolio of IHT-free Aim shares.

“Of course it is perfectly possible to pick your own stocks. But unless you are a keen investor, we would suggest finding a manager to select the Aim shares for you,” he said.

“There are some great stocks in the pool but quite a few lemons, too. In addition, not all Aim stocks are exempt and those that are today might not be tomorrow.”

He warned that specialist Aim portfolios typically charged high fees.

Mr Davies tipped the £35m RC Brown Aim IHT portfolio for its “experienced management team”. The portfolio focuses on larger Aim companies worth around £500m on average. It charges a 1.25pc ongoing management fee.

He also tipped the £86m Stellar Aim IHT portfolio, managed by Stephen English. The portfolio focuses on smaller firms and charges an initial 2pc fee and then a 1.5pc ongoing charge.