HM Revenue & Customs (HMRC) has reported that there were 27,000 inheritance tax (IHT) paying estates in 2020/21 tax year.
This is an increase of 4,000 (17%) from the year before. Average IHT bill fell 1%, down £2,000 to £214,000 (2020/21 figures).
Total IHT liabilities rose 16% to £5.76bn ($7.43bn, €6.71bn) in tax year 2020/21. This makes it the largest single-year rise in IHT tax liabilities since 2014 to 2015 when tax liabilities rose by 25% (£840m).
One key driver behind this surge in tax liabilities is the 18% increase in overall UK deaths, partly attributed to the Covid-19 pandemic and escalating property prices, contributing to more individuals ending up with IHT liabilities.
The number of deaths in the UK rose from 612,000 to 722,000 (18%), leading to a knock-on rise in taxable wealth transfers.
Additionally, the frozen nil-rate band (NRB) also contributes to the rise in IHT tax liabilities, as it means more and more people end up with an IHT liability.
Nicholas Hyett, investment manager at Wealth Club, said: “A lot of the increase is probably down to the spike in house prices we saw during the pandemic, paired with the freeze in inheritance tax bands all the way back in 2009. This ‘fiscal drag’ is a sneaky attempt by the government to grab more cash without taxpayers noticing.
“The result is that families whose houses and assets wouldn’t have qualified for IHT just a couple of years ago, are now finding themselves dragged into this most hated of taxes despite no change in their underlying wealth. They live in the same house and enjoy the same standard of living – but now they fall victim to a tax that was originally targeted only at the very wealthy. Unfortunately, that’s a trend that’s set to continue.”
Political problem
The IHT regime has come under fire a lot over the last decade – especially calls from opposition parties saying thresholds should be lowered.
But on the other hand, 50 Conservative MPs also demanded that UK prime minister Rishi Sunak should scrap IHT, which they described as “morally wrong”.
The IHT issue is a political problem – and no one is prepared to find the right answer to fix the issue.
Stephen Lowe, group communications director at retirement specialist Just Group, said: “The latest inheritance tax annual bulletin is a reminder that only a small proportion of estates are liable for paying the tax, although we expect the frozen thresholds and increase in property prices through the pandemic to push more estates into paying inheritance tax.
“Inheritance tax continues to return a tidy sum to The Treasury with the latest data showing that it generated around £22m every day through the first quarter of this financial year – but rumours persist that the government will consider taking the radical step of scrapping it to curry favour with the voting public.
“Regardless of what any political party may promise, these rising inheritance tax receipts should act as a warning for people to remember to assess the entire value of their estate, including an up-to-date valuation their property. Professional, regulated advice can also help people work out the total value of their estate, calculate how much tax they may be likely to owe and understand what options they have to manage that tax bill.”
Rachael Griffin, tax and financial planning expert at Quilter, added: IHT remains widely unpopular, making it a prime candidate for much-needed reform. With IHT thresholds frozen until 2027/28, more and more people are getting caught in the IHT net simply because of property wealth.
“The impact of soaring inflation, coupled with the cost-of-living crisis, disproportionately affects the younger population. Consequently, there is a growing need to facilitate the smooth transfer of wealth both during one’s lifetime and upon the passing of loved ones.
“There has been much talk of abolishing IHT altogether over the years. Proponents of abolishing IHT laud the move as a move away from taxing people twice on their earnings. The reality is that there is a chance that abolishing IHT could help turbocharge wealth creation and therefore the economy but abolition could also usher in a new even more hated tax – a wealth tax.
“Considering how lucrative the tax is, getting rid of it altogether could punch a hole in the country’s budget compounding an already bleak economic outlook and the government will need to fill that hole.”
