The impact of Government’s decision to maintain the Inheritance Tax (IHT) thresholds at their 2020/21 levels is evident in the latest Inheritance Tax liabilities statistics published for 2022/23.
4.62% of UK deaths resulted in an IHT, a small increase of just under a quarter of a percent on the previous tax year. 31,500 estates were liable for IHT, an increase of 3,700 (13%) since 2021/22; but the overall proportion of estates liable for IHT remains relatively static at fewer than one in 20.
The overall IHT liability for 2022/23 was £6.70bn, a rise of £710m (12%) year on year; the result of a higher volumes of wealth transfers following recent IHT-liable deaths, continued rises in asset values, and the freezing of the residence nil rate band (RNRB). HMRC said the average effective tax rate paid by taxpaying estates was 13% (compared to the headline marginal rate of 40%), reflecting the impact of exemptions, reliefs, and tax-free allowances
At a more local level London and the South East account for 44% of the total IHT charged across the UK. The lowest number of taxpaying estates were found in the North East of England, Northern Ireland, and Wales which HMRC attributed to lower house prices in those regions.
The change in reporting requirements for excepted estates for deaths occurring from 1sr January 2022 which no longer requires non-taxpaying estates to report transferred assets to surviving spouses and civil partners on death means a sizeable reduction in the value of reported transfers, down 61% to £5.98bn. And charity giving appears to have fallen from £2.07bn in the tax year 2021/22 to £1.92bn in the tax year 2022/23, although the change in reporting requirements for excepted estates between years could partially explain this.
For Stephen Lowe, director at retirement specialist Just Group, the figures show the ever increasing grip of IHT, fuelled by the ongoing freeze to thresholds and rising asset values, and inflation with estimates of as many as one in ten deaths subject to IHT by the end of the decade.
“The removal of the pensions exemption from IHT will be the biggest driver of this increase with the OBR projecting that, from April 2027, this change will bring 31,200 more estates into scope of IHT before the end of 2029/30.”
Ian Dyall, head of estate planning at Evelyn Partners adds the frozen nil rate bands offer ‘less and less protection’ against IHT given the continued rise in asset value, especially equities and property.
“The OBR forecasts total IHT liabilities for 2024/25 to rise 11.6% on the previous year to £8.4 billion, while receipts data shows HMRC has so far taken £8.2billion for that period. The OBR also forecasts that in the current 2025/26 tax year IHT will raise £9.1 billion.”
“What these lagged annual liability figures do give us is some granular detail on how IHT is distributed and what reliefs are being used. First, while many more households are being drawn into the IHT net, it remains the case that the bulk of liabilities tend to be fairly concentrated among a small number of large estates. About 6,400 families with net wealth greater than £1.5million paid £4.3billion in IHT – or 64% of the total.”
Kieran Bowe, partner in the Private Client team at law firm Russell-Cooke LLP added
“Since the freezing of the Nil Rate Band in 2009-10 at £325,000 HMRC’s IHT Revenue has surged increasing by almost 250% in 2024-25, whilst house prices have risen by approximately only 85% over the same period according to HM Land Registry. The effect of the freezing of the Nil Rate Band for 15 years is many more families than ever before are being caught for IHT as wealth passes from one generation to the next.”
Proposals to include pension assets in the value of the estate, announced by Chancellor Rachel Reeves in her Autumn Budget, are expected to bring 10,500 additional estates into IHT liability where they would previously not have done, with a total of 38,500 of the 213,000 estates liable by 2027/28, paying more in IHT than previously; with estimates of around £34,000 in increased tax liability projected.
HMRC has also provided ‘welcome additional detail’ into the spread of Agricultural (APR) and Business Property Relief (BPR) claims says Boew.
“Around a third of estates currently qualifying for APR made claims of more than £1m. Under the new rules coming next year those estates would have faced significantly higher IHT bills, with today’s figures revealing the important role that APR, and BPR, plays in helping families protect and pass on their businesses to the next generation. IHT paying estates are now also subject to an increase in the rates of interest charged by HMRC from 2.5% above base rate to 4% above base from April 2025, arguably penalising lower value taxable estates where the value of the family home represents most of the wealth inherited by descendants and loved ones.”
“The impact of these changes is many more families will be brought into scope for IHT than before the implementation of changes to the IHT regime as announced in the 2024 Autumn Budget .”
But the Treasury cannot expect the wealthy to ‘prop up the public finances’ says Dyall,
“The danger with seeking further taxation of wealth at the next Budget – whether that is via capital gains tax, inheritance tax or some other mechanism – is that such households, which are often wealth and business creators in themselves and quite mobile, could get fed up and leave the country. As they are responsible for a good chunk of overall tax revenues in the UK that would be counter-productive.”
“Alternatively, they will change their behaviour in such a way as minimise tax liabilities. It’s likely that, as IHT at 40% deplete the estates of wealthy families more significantly year by year, more of them will take advice and seek ways of sidestepping the tax, such as shrinking their estates through lifetime gifting. Which is why the gifting regime could be in the sights of the Treasury for further reform.”
