Tax by tax, spend by spend

Inheritance tax

Please note the charts on this page have not been updated for March 2021 forecast due to a software issue. We will endeavour to update them as soon as possible.

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 2019-20 IHT raised £5.1 billion. That represented 0.6 per cent of all receipts and was equivalent to 0.2 per cent of national income.

The rate of IHT is normally 40 per cent on the value of an estate above a threshold of £325,000. This threshold is frozen until 2025-26. Any unused threshold may be transferred to a surviving spouse or civil partner, increasing their combined threshold to up to £650,000. There is an additional transferrable main residence nil rate band of £175,000 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.

  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. (EFOs).

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 liable 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 until 2025-26), the Government has set out its default indexation assumption as IHT thresholds rising in line with CPI inflation. The number of deaths is projected in line with the ONS principal population projection (although we moved away from this to take account of the excess deaths associated with the coronavirus in our post-pandemic forecasts).

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 starting point 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 consistently stronger than our forecasts. This partly reflects stronger-than-expected average house price inflation from our March 2013 forecast onwards. But it 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.

The coronavirus outbreak and the public health measures taken to contain it has led to a significant decline in asset prices, and receipts are now likely to be significantly weaker than in recent forecasts.

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  Policy measures

Since our first forecast in June 2010, governments have announced several 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 Budget 2010, Budget 2013 and the July 2015 Budget, and again at the March 2021 Budget. It is due to remain at this level until 2025-26; 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 has raised 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 2019 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 2019 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 taxes

Boxes

Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In the July 2015 Economic and fiscal outlook, we made a number of adjustments to real and nominal GDP, the labour market, inflation, business and residential investment, and the housing market.

Economy categories: Labour market, GDP by expenditure, National Minimum Wage and National Living Wage, Inflation, Business investment, Residential investment, Housing market

Fiscal categories: Public spending, Receipts, Inheritance tax, Insurance premium tax, Vehicle excise duties, Welfare spending, Housing benefit, Housing associations

Receipts from capital taxes

Receipts from capital taxes
Receipts from capital gains tax (CGT), inheritance tax (IHT) and stamp duty land tax (SDLT) were expected to rise sharply over our March 2014 forecast. This box set out the drivers behind that rise, in particular the impact of rising effective tax rates.

Fiscal categories: Receipts, Inheritance tax, Stamp duty land tax, Capital gains tax

The impact of the reforms to the taxation of property transactions

The impact of the reforms to the taxation of property transactions
The Government announced substantial reforms to the residential stamp duty land tax (SDLT) system at Autumn Statement 2014. This box explored how the tax system changed and how these reforms were costed.

Economy categories: Housing market, Property transactions, House prices

Fiscal categories: Receipts, Inheritance tax, Stamp duty land tax

Cross-cutting categories: Forestalling, Devolution