The number of UK deaths resulting in an inheritance tax (IHT) charge increased by 17% to 27,000 estates in the tax year 2020-21 from the previous period, new data released by HM Revenue & Customs (HMRC) shows.
HMRC also revealed that IHT tax liabilities in 2020-21 were £5.76 billion, up £800 million (16%) compared to the previous year. This is the largest single-year rise in IHT tax liabilities since the 2014 to 2015 tax year, when tax liabilities rose by 25% (£840 million). What’s more, tax liabilities are now at their highest level on record, surpassing the previous peak of £5.05 billion in the 2016 to 2017 tax year.
This must, however, be read in the context of the 18% rise in the number of overall deaths that year, in part due to the Covid-19 pandemic. Indeed, the proportion of taxpaying estates as a share of all UK deaths in 2020-21 remained relatively steady.
Elsewhere in HMRC’s report it was revealed the largest exemption set against assets continues to be for transfers between spouses and civil partners. In the 2020 to 2021 tax year, £15.7 billion was transferred to surviving spouses and civil partners on death, a rise of £2.7 billion (21%) on 2019 to 2020. This exemption was used by 24,000 estates above the Nil Rate Band (NRB) in the tax year 2020 to 2021.
The combined value of agricultural and business property relief (APR, BPR) was £4.2 billion in the tax year 2020 to 2021. This was an increase of £1.4 billion (51%) compared to the tax year 2019 to 2020. Most of this increase was concentrated in the value of BPR, which increased by £1.3 billion. The value of APR increased by only £91 million.
The value of exempted transfers to qualifying charities also increased, to £1.8 billion in the tax year 2020 to 2021 from £1.6 billion in the tax year 2019 to 2020.
Indeed, the headline marginal rate of IHT being 40%, the average effective tax rate for the year was lower, at 13%, for all 27,000 taxpaying estates due to the combination of tax-free allowances, exemptions, and reliefs used by taxpaying estates.
Industry reaction
Rachael Griffin, tax and financial planning expert at Quilter, described the trend in IHT liabilities as “concerning”:
“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.”
Katharine Arthur, Head of Private Client at haysmacintyre, said:
“At a time when calls for inheritance tax to be abolished are rife, the fact that receipts for the tax are up 15% over the past 12 months – and hit an all-time high in June 2023 – will only add fuel to the fire. But debate over inheritance tax has featured in the run-up to general elections before, as a tax that can is seen as unfair by many of those who are affected by it, and as yet it hasn’t been scrapped, or even subject to major reform.
While inheritance tax is increasing steadily year on year, it is not increasing disproportionately to HMRC’s overall tax take – we have to look at the bigger picture and take the wider economic backdrop into context. And although inheritance tax consistently accounts for just under 1% of HMRC’s total tax receipts every year, it is still an important receipt for billions of pounds of cash for the Treasury’s coffers. Were we to scrap inheritance tax altogether, we would need an alternative means to plug the hole that the Treasury would be left with, which in itself would be a significant political and economic decision.”
