The government has announced changes to the Inheritance Tax advice (IHT) rules which came into effect on the 6th of January.
Under the rules, you have six months from the date of an IHT “event” to make the relevant Inheritance Tax payment. An IHT “event” might be a death (commonly), or a transfer in or out of a trust for example.
The new change relates to interest charges. From the 6th January the rate of default interest for unpaid Inheritance Tax will be 6% up from 2.5% last year. That’s an increase of 240%.
By contrast, interest due to individuals from HMRC for over paid Inheritance Tax will now be 2.75%, up from 0.5% the year before. You might wonder why there is a difference between you having to pay the government of you are late paying your IHT and the government paying you if you’ve overpaid. No Inheritance Tax advice answer was offered.
Where IHT relates to assets for sale, most commonly houses. There is a dispensation to make the repayment annually in instalments for up to 10 years. However, the default rate will still be applied.
The tax revenue from IHT has been on the increase for years now as the IHT allowance rate has remained fixed at £325,000.
There are other Inheritance Tax advice threats on the horizon as well.
The latest report from the Institute for Fiscal Studies (IFS) made a recommendation to change the Inheritance Tax treatment of Defined Contribution (DC) pensions on death. Currently there is no IHT paid on the DC pension on death and if the deceased was under 75 the pension will usually pass to the beneficiaries. DC pensions are usually personal or workplace pensions. The IFS proposals suggest that DC pensions could be taxed at the basic rate on death. The IFS estimates that this would raise an additional £1.9 billion in IHT and make the tax system “fairer”. Some might argue that this might act as another barrier to encouraging pension savings.
The latest figures from HMRC showed that between April and December 2022 IHT increased by £700 million on the previous year. With the total now at £5.7 billion. Experts estimate that with thresholds frozen until 2027, another £1 billion in IHT will be collected. This is what you call a stealth tax. Increasing taxes massively without changing anything or making any announcements about it.
In other news, HMRC announced that the cost of pension tax relief had reached £27 billion this year. This is the tax relief at 25% offered by the government on pension contributions. In the same way that IHT returns increase because the threshold hasn’t changed, so the costs of pension tax relief have increased because wages have increased. This in turn has increased pension contributions.
Some commentators are concerned that the government may be looking to reduce the costs of this relief. But so far there has been no news from the treasury.