The number of families paying inheritance tax (IHT) has increased by 17 percent, a new report published by HMRC shows.
In the 2020/21 tax year, total IHT liabilities rose 16 percent to £5.76billion while the average inheritance tax bill fell by one percent, down £2,000 but still to a staggering £214,000.
According to the report, the rise is likely due to both the knock-on effects of the COVID-19 pandemic on the volume of wealth transfers and IHT-liable deaths in that year, as well as continued rises in asset values.
Ian Dyall, head of estate planning at wealth management firm Evelyn Partners, said: “Inheritance tax has grabbed some headlines recently with the possibility that it will become a policy issue at the next general election.
“Given the steadily rising tide of IHT receipts taken by the Treasury, driven in large part by frozen nil-rate band thresholds and rising asset prices, it’s perhaps not surprising that this already unpopular tax is now widely regarded as another ‘stealth tax’.”
Mr Dyall said that, while there was undoubtedly a COVID-19 mortality effect on the IHT tax take in the period addressed by this data, more up-to-date statistics do show that annual IHT receipts have continued to surge.
He explained: “They have more than tripled from about £2.3billion in 2009/10 to an estimated £7.1billion for 2022/23, and have also nearly doubled as a percentage of GDP from 0.15 percent to 0.28 percent during the same time.”
HMRC’s latest monthly data showed IHT receipts hit a staggering £2billion between April and June 2023, which reflects a whopping £200million increase from the same three-month period last year.
Mr Dyall attributed this vast increase to frozen tax allowance thresholds combined with soaring house prices and asset values.
He said: “As the nil-rate band of £325,000 and the residential nil-rate band of £175,000 have not been increasing with inflation – as many tax thresholds used to – and are not due to, more families and more assets have been dragged into the IHT net thanks to rising property prices and investment asset values.”
Although Mr Dyall added that it is “worth noting” that in the light of weakening asset prices over the last 12 to 18 months, many households may have overpaid IHT; the bill must be estimated and settled with HRMC by the end of the sixth month after death.
He said: “If assets are then sold at prices lower than had been estimated then it is up to beneficiaries to reclaim the overpaid tax.”
According to the annual analysis, the most used tax relief was the exemption between spouses and civil partners, which sheltered £15.7billion of assets from tax. Business Property Relief (BPR) was the second most valuable, shielding up to £3.2billion of assets.
The report also indicated a significant reduction in the number of trusts in existence over recent years. Mr Dyall said: “There could be a number of reasons for this. In 2006, there were significant changes to the inheritance tax treatment of trusts.
“Most new trusts created during lifetime since that date are potentially liable to a small (up to six percent) inheritance tax charge on each 10-year anniversary. Some trustees may be choosing to wind up trusts before the next anniversary.”
He added that there has also been an increase in the “administrative burden” of trusts, with the majority of trusts now needing to register online as part of EU money laundering legislation.
Mr Dyall said: “The reduction in the use of trusts is disappointing as they can be a useful solution to many of the issues that worry people when passing on assets to the next generation. For example, they can protect assets in the event of divorce or bankruptcy, or ensure that the assets are invested sensibly and used wisely.”
Shaun Robson, head of wealth planning at Killik & Co said inheritance tax has been a “big earner” for HMRC this past tax year and it is “likely” to be a record year of IHT.
He said: “Even if the future of it is seemingly up in the air, people should be considering action to reduce their tax liabilities as many families could be handed a surprise tax bill.”
From gifting to utilising exemptions, find out more about ways to reduce inheritance tax liabilities.