Inheritance tax makes an increasing amount for HMRC - can you avoid it?

The numbers have been crunched and the stats are in – the taxman enjoyed another increase in inheritance tax payments in 2021/22 as more people are landed with a IHT bill. 

As the chancellor Rachel Reeves looks for ways to plug the black hole in public finances it will have been good news for her that inheritance tax is bringing in more cash every year.

Latest figures from HMRC show inheritance tax (IHT) receipts rose by 4% in the 2021/22 tax year, meaning that the taxman banked an extra £0.23bn from the hated death tax.

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In that year 4.39% of deaths resulted in an IHT charge. There were 27,800 estates that paid inheritance tax, 800 more than the year before. It shows that far more people worry about IHT than pay it, but the number of us being stuck with a tax bill after death is steadily rising thanks to a combination of frozen tax thresholds and rising asset values.

“With the baby boomer generation now hitting their sixties and seventies, some of that generation’s accumulated wealth is being passed on to children and grandchildren, and getting taxed on the way,” says Laura Hayward, tax partner at wealth management firm Evelyn Partners.

“The ‘great wealth transfer’ is also underway because many of the older, wealthier generations are making lifetime gifts to their families.” 

How much IHT was paid? 

In total £5.99bn was paid in IHT in the 2021/22 tax year, an increase of £230m on the previous year.

A significant proportion of that was paid in London and the South East, together they account for over 50% of the total IHT paid in England.

“This disproportionate contribution is largely due to the higher property values and greater concentrations of wealth in these areas,” says Shaun Moore, tax and financial planning expert at Quilter. “Properties in London and the South East often exceed the IHT net, creating a greater burden on families.”

However, families are making the most of the allowances available to cut their inheritance tax bills. There are plenty of ways you can cut your inheritance tax bill.

The data showed that the most used tax relief was the exemption between spouses and civil partners, this protected £15.5bn of assets from the taxman.

The Residence Nil-Rate Band (RNRB) was also used to successfully minimise IHT bills. “Despite its complexities the RNRB continued to play a crucial role in estate planning,” says Moore. “In 2021 to 2022, 25,800 estates utilised the RNRB, sheltering £6.5 billion of chargeable estate value from IHT, an increase of £0.4bn from the previous year.”

Why has IHT been rising?

Inheritance tax receipts have been steadily rising for years thanks to the frozen thresholds. The nil-rate band – how much you can pass on without paying IHT – has been £325,000 since 2009 and is currently meant to remain frozen until 2028.

“Even if the new government leaves the tax rules unchanged, it’s going to rake in more of this tax, and if it chooses to tinker, taxpayers could end up forking out even more,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.

The Office for Budget Responsibility has forecasted that by keeping the thresholds frozen at £325,000 plus £175,000 for the primary residence nil-rate band the share of deaths resulting in an IHT bill will hit 6.3% by the 2028/29 tax year “the highest level since the 1970s,” says Hayward. Back in 2009 when the threshold was first frozen just 2.7% of estates paid IHT.  

Which will mean the government will make almost £9bn from IHT in 2028/29.

The great wealth transfer will also help the government make more money from death taxes. “As the wave of inheritance is set to grow over the next 30 years to a transfer of £5.5 trillion, the temptation of successive Governments will be to tap into it to plug gaps in the public finances,” says Hayward.

The general presumption is that the new Labour government isn’t going to leave IHT alone. It “could be considered a soft target for a hike in the October Budget,” says Coles.

One area the chancellor could tinker with is the agricultural (APR) and business property relief (BPR). These protected £4.4 billion of assets from tax in the 2021/22 tax year – up 5% on the previous year. 

“Even clawing back a percentage of this tax revenue would go some way to helping refill public coffers,” says Moore. “Labour might opt to remove APR for those who do not actually own farmland and BPR where it doesn’t meet the intention of the relief i.e. protecting small businesses being kept ‘in the family’.”

Another option might be that the government looks again at the rules that exempt inherited pensions from IHT.

“It seems likely that HMRC will increase investigations, which could prove a useful source of extra funds from families accidentally understating the value of the estate,” says Coles. “However, this would add yet more misery, uncertainty and delay to the process of probate, which already forces families to put their lives on hold for months.”

You can read our predictions for the October Budget but whether IHT is changed or not more of us are going to pay it in the future. That means we all need to embrace estate planning and ensure we understand the facts of inheritance tax and dispel the inheritance tax myths.