Tax by tax, spend by spend

Inheritance tax

Inheritance tax (IHT) is usually levied on the value of all the assets in an individual’s estate on death, after deducting any liabilities, exemptions and reliefs. Assets left to a spouse or civil partner of the deceased are usually exempt, as are assets left to a charity. In our latest forecast, we expect IHT to raise £5.4 billion in 2018-19. That would represent 0.7 per cent of all receipts and is equivalent to 0.3 per cent of national income. In 2017-18, around 22,600 estates were liable to inheritance tax – around 3.8 per cent of the total.

The rate of IHT is normally 40 per cent on the value of an estate above a threshold of £325,000. Any unused threshold may be transferred to a surviving spouse or civil partner, increasing their combined threshold to up to £650,000. This threshold is frozen until 2020-21, after which it increases in line with CPI. From 2017-18 onwards, there is an additional transferrable main residence nil rate band of £100,000 (rising by £25,000 each year until 2020-21 and by CPI after that) available when a home is left to children or other direct descendants. The rate of IHT is reduced to 36 per cent if 10 per cent or more of the net value of the estate above the threshold is left to charity.

  • Recent trends

    The charts below show tax receipts in both cash terms and as a share of national income (GDP). Receipts measured in cash terms are a simple metric for analysing trends over time. But without putting the cash amount into context – by asking how much national income is available to be taxed – interpreting changes in cash receipts is difficult, particularly over long time periods.

    Trends in receipts as a share of GDP are useful to understand how they move in line with the underlying economic activity that is being taxed. In cash terms, both receipts and GDP will tend to rise over time because of economic growth and inflation. Receipts as a share of GDP is the most relevant metric when considering the sustainability of the public finances. Movements in this ratio can be thought of in two parts – movements in the tax base relative to national income (i.e. whether asset prices have grown faster or slower than the whole economy) and changes in the effective tax rate (i.e. the amount of tax raised per unit of the tax base).

    IHT receipts have increased as a share of GDP since 2009-10, mainly due to rises in asset prices. Residential property makes up the largest share of most estates and average house prices have risen by more than 30 per cent in that period. The rise also reflects significant fiscal drag as the IHT threshold has remained at £325,000 since 2009.

    Inheritance tax receipts: ONS (ID: ACCH)

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  • Latest forecast

    Our latest fiscal forecast was published in March 2018. IHT receipts are set to rise slightly as a share of GDP by 2022-23. The effect of continued growth in asset prices is partly offset by the rising path for the main residence nil rate band from 2017-18 to 2020-21. This reduces receipts by around £0.2 billion in 2017-18, but by around £1.5 billion in 2020-21.

    More detail on our latest forecast and how it was revised relative to our previous forecast in November was provided in paragraph 4.59 of our March 2018 EFO.

    Expand to read the extract from our March 2018 EFO

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  • Latest monthly data

    IHT receipts are spread evenly throughout the year. They reflect asset prices with a lag of around 6-12 months, as payment is not required until some months after the liable death. The lumpy profile across months can reflect large payments by high-value individual estates or trusts.

    IHT receipts were unusually strong in the first three months of 2017-18, up 23 per cent on a year earlier. One reason may be that IHT was paid more promptly as executors tried to avoid the sharp rise in probate fees (particularly for high-value estates) that had been planned to take effect in May of that year but was subsequently reversed. Absent any further policy changes, we expect IHT receipts to resume their pre-2017-18 monthly pattern in future.

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  • Forecast methodology

    Forecast process

    The OBR commissions forecasts of IHT from HM Revenue and Customs (HMRC) for each fiscal event. The forecasts start by generating an in-year estimate for receipts in the current year, then uses a model to forecast growth in receipts from that starting point. We provide HMRC with economic forecasts that are used to generate the tax forecasts. These are scrutinised in a challenge process that typically involves two rounds of meetings where HMRC analysts present forecasts to the Budget Responsibility Committee and OBR staff. This process allows the BRC to refine the assumptions and judgements that underpin the forecasts before they are published in our Economic and fiscal outlooks.

    Forecasting models

    The IHT forecast is based on a micro-simulation model. Administrative data on a sample of estates are used to estimate the total population of estates being passed on at the point of deaths and the amount of tax due on those estates. The data are projected forward using our forecasts for things like house prices and equity prices. Except where the threshold has already been announced (it is currently frozen at £325,000 until 2020-21), the Government has set out its default indexation assumption as IHT thresholds rising in line with CPI. The number of deaths is projected in line with the ONS principal population projection.

    Main forecast determinants

    The main determinants of our IHT forecast are those related to the tax base, i.e. the various types of financial and non-financial assets left upon death. See the ready reckoners section below for more information on the main effects of these determinants on IHT receipts.

    Main forecast judgements

    The main forecast judgement in the IHT forecast relates to the starting point from which the model is applied:

    • In-year estimate – Our estimate for IHT receipts in the current year is determined by year-to-date performance of receipts and indications from HMRC’s internal receipts monitoring. The in-year estimate determines the base year from which we use our model to forecast receipts growth. For IHT, this judgement is often affected by large one-off payments from high-value estates, where we need to determine the extent to which such payments should be assumed to repeat in future years.

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  • Previous forecasts

    Since June 2010, IHT receipts have been systematically stronger than our forecasts. This partly reflects stronger-than-expected average house price inflation from our March 2013 forecast onwards. But this also reflects under-estimates in our forecasts for the average value of estates subject to IHT, which partly reflects trends at the top-end of the property market.

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  • Policy measures

    Since our first forecast in June 2010, governments have announced 11 policy measures affecting our forecast for IHT receipts. The original costings for these measures are contained in our policy measures database and were described briefly in the Treasury’s relevant Policy costings document. For measures announced since December 2014, the uncertainty ranking that we assigned to each is set out in a separate database. For those deemed ‘high’ or ‘very high’ uncertainty, the rationale for that ranking was set out in Annex A of the relevant Economic and fiscal outlook. These policy costings include:

    • a reduction in the rate to 36 per cent for estates with charitable donations of more than 10 per cent from 2012-13 was announced at Budget 2011;
    • freezes to the threshold to keep it at £325,000 were announced at the June 2010 Budget, Budget 2013 and the July 2015 Budget. It is due to remain at this level until 2020-21; and
    • the introduction of a transferrable main residence nil rate band starting at £100,000 in 2017-18, rising in stages to £175,000 by 2020-21,was announced at the July 2015 Budget. This will take a married couple’s tax-free threshold for their main residence to £1 million.

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  • Ready reckoners

    ‘Ready reckoners’ show how our fiscal forecasts could be affected by changes in selected economic determinants. They are stylised quantifications that reflect the typical impact of changes in economic variables on receipts and spending. These estimates are specific to our March 2017 forecast and we would expect them to become outdated over time, as the economy and public finances, and the policy setting, continue to evolve. They are subject to uncertainty because they are based on models that draw on historical relationships or simulations of policy settings. More information can be found in the ‘Tax and spending ready reckoners’ spreadsheet we published alongside our 2017 Fiscal risks report.

    The table below shows that:

    • Property prices and equity prices affect the value of assets subject to IHT, with property prices roughly twice as important (in line with their share of the value of assets liable to IHT).

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  • Other information

    Our forecast for the total number of estates subject to inheritance tax can be found in our published supplementary tables.

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  • Boxset

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