Inheritance tax freeze 'disproportionate' amid UK borrowing plateau

Stubborn inheritance tax (IHT) thresholds in the UK are proving increasingly “disproportionate” as government borrowing levels fall far short of OBR forecasts, according to Mike Hodges, partner and head of private wealth at Saffery Champness.

The UK government borrowed less than the £152bn the Office for Budget Responsibility (OBR) predicted last year, with an estimated £139.2bn borrowed in the year to March 31.

“The government’s decision in 2021 to freeze the Inheritance Tax thresholds, amongst numerous other reliefs and allowances, has had a marked effect and is clearly starting to bear fruit for the Treasury,” Hodges says.

“At the time the OBR estimated that the Treasury will rake in an additional £1.5bn in inheritance tax receipts.”

With total IHT receipts for 2022-2023 being £1bn more than the year prior, Hodges believes this prediction is being “borne out.”

“The practical upshot is that more and more estates will continue to face an inheritance tax bill, with the effect of the recent freezes exacerbated still further by the fact that the nil rate band – the amount that can be passed on tax-free – has not changed since 2009,” he adds.

Hodges believes if the IHT trend continues, it may be challenging for Jeremy Hunt to resist suspicion that he is looking to cut taxes or increase spending before the next general election.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The governments room to manoeuvre on fiscal policy will be determined by whether the OBR is able to maintain its much more bullish view on medium-term growth compared to the position taken by the other official forecaster – the Bank of England.”

Fourth largest borrowing year since records began

Public sector net borrowing of £21.5bn for March 2023 was the second-most borrowed for March since records commenced in 1993.

Beck says: “Public sector net borrowing (excluding public sector banks) came in at £21.5bn in March, £16.3bn higher than a year earlier.

“Factoring in large downward revisions to prior months, caused by changes to the treatment of student loans, the preliminary estimate for borrowing in fiscal year 2022-2023 as a whole was £139.2bn.”

The total amount borrowed by the government over the course of the year also means it is the fourth largest borrowing year since records began.

Beck says public sector receipts and spending both came in below OBR projections, with the spending undershoot “particularly significant.”

“However, a large part of the borrowing data still relies on forecasts, with the gaps in outturn data only being filled over the course of several months. Therefore, the true picture for 2022-2023 is unlikely to emerge for some time yet,” he adds.