Bumper £7bn IHT receipts could tumble in the year ahead

HMRC has published its latest statistics for the financial year to 31 March 2023 and the total provisional tax receipts have increased by nearly 10% on the year before to £786.6bn. One of the more eye-catching increases is the additional inheritance tax (IHT) that has been raised in the last year, increasing from a little over £6bn to just under a record-breaking £7.1bn. 

HMRC has confirmed that the increase in IHT receipts over the last 20 years is largely due to increases in asset prices over that period, in particular the growth in residential house prices. Looking at the data in more detail, the annual receipts for IHT hovered above and below £5bn between 1 April 2016 and 31 March 2021. 

We’ve therefore seen a spike in IHT receipts in the last two financial years, an increase of over £1.75bn in IHT receipts, which follows a similar spike in residential house prices. IHT could be said to be one of the longest-standing stealth taxes with its tax-free allowance, known as the nil-rate band, remaining unchanged at £325,000 since 2009. A further allowance known as the residence nil-rate band, worth up to £175,000, was phased in from April 2017 but these are set to remain at their current levels until at least April 2028.

On average, house prices in the UK increased by around 9% from last year and IHT receipts increased by 17%. The chart below highlights the correlation between house price and inheritance tax revenue growth from April 2010. In this period, average house prices have increased by 76% whilst IHT receipts have increased by 197%.

The chancellor cannot however bank on stellar IHT receipts for the financial year ahead. The average for residential house prices peaked in November 2022 and have been falling since. IHT is typically payable six months after the end of the month in which the individual died. This fall in house prices should therefore start to impact on IHT receipts in the coming months. 

Those who have inherited properties at a high value may also be able to claim an IHT refund if it is later sold following a drop in property prices. In order to benefit from this, the property must be sold within four years of the date of death. In addition, there needs to be at least a 5% or £1,000 drop in the value of the property, whichever is lower, in order to qualify for an IHT refund. The chancellor will therefore be hoping for the property market to turn in his favour. If property prices continue to slide this year, we could see significant refunds to taxpayers of the IHT receipts received by the Treasury this year.