After HM Revenue and Customs released its annual inheritance tax (IHT) receipts for the 2022/23 tax year, showing another rise in the number of estates paying IHT, wealth managers react and look at ways of mitigating the tax.

HM Revenue and Customs' (HMRC) latest annual inheritance tax (IHT) receipts for the 2022/23 tax year show that the number of estates paying inheritance tax rose 13 per cent to 31,500, compared with the previous year.

“Frozen inheritance tax allowances mean the number of estates paying inheritance tax continues to rise. This is no accident, the government is actively using inflation to squeeze more tax out of middle and upper-middle income families. The trend will have only gathered pace in the years since 2022/23,” Nicholas Hyett, investment manager at Wealth Club said.

The current IHT allowance has been frozen at £325,000 ($429,000) for 16 years, and will remain frozen for another five years until 2030. The £175,000 residence nil rate band hasn’t changed since 2020. 

“Large estates continue to shoulder the overwhelming majority of the burden. Just 1 per cent of estates paid around 65 per cent of all inheritance tax in 2022/23 and the average bill for those estates valued at over £10 million hit £3.6 million,” Hyett continued.

“IHT is particularly controversial for the wealthiest, most globally mobile taxpayers. Why stay in the UK and give up about 40 per cent of your wealth, when you can move overseas and cut the bill dramatically – it’s not like you don’t have the cash to visit the UK regularly to see friends and family,” Hyett added. “The government is hoping its reforms will increase the effective tax rate paid by these highest earners going forwards, it might succeed, but it would be no surprise if that was offset by a decline in the number of people who are prepared to stick around and carry the can.”

UK wealth manager Rathbones estimates that 3,524 estates will be hit with IHT bills of over £500,000 by the end of the 2025/26 tax year, based on an average annual increase of 8.74 per cent. This assumes that the trend since 2022 will continue but, given that pensions will soon be included, the firm said that instead it is likely to increase. 

“Death is becoming an increasingly costly business. The number of estates paying IHT rose by 13 per cent in the 2022/23 tax year and is rapidly approaching the 2006/07 peak. It is on course to surpass that milestone before the end of the decade – even before factoring in the inclusion of pensions in IHT calculations from April 2027,” Rebecca Williams, divisional lead of financial planning at Rathbones, said.

Claire Trott, head of advice at St James’s Place, also highlighted that IHT liabilities will rise sharply from 2027, as pension pots come within the scope of inheritance tax for the first time. “Based on 2022/23 figures, the number of estates paying IHT could soar from 31,500 (2022/23 actual) to an estimated 49,000 or more, including 10,500 solely because of the pension IHT changes – a staggering 55 per cent increase over just five years. And that’s likely just the tip of the iceberg,” Trott said. “Without proactive planning, many families risk facing unexpected and potentially avoidable tax bills. This makes it more important than ever to seek ongoing, regulated advice around IHT mitigation and retirement planning, to help ensure wealth is passed on efficiently and future generations are protected.”

Pete Fairchild, national head of private clients at Crowe, highlighted how more individuals are reverting to seeing their pension pot as a vehicle to provide income in retirement, as opposed to an IHT planning opportunity. “We are seeing more lifetime giving as people look to pass on their wealth and survive seven years to reduce their chargeable estate. Many clients have taken their 25 per cent tax-free lump sum from their pension and gifted that immediately to their children,” Fairchild said. “It remains to be seen whether the Chancellor will use the Autumn Budget to tinker with these proposals. We await with interest.”

Until there is clearer direction on what comes next for IHT, there are steps individuals can consider to manage their IHT exposure:

1. Give it away – smartly
Gifting money or assets is one of the simplest ways to cut an IHT bill.

People can give up to £3,000 a year tax-free to anyone, or unlimited gifts to your spouse or civil partner. Additionally, one can make regular gifts from your income – helping reduce the size of an estate over time. But it’s important to remember that gifts made within seven years of death may still be taxed.

2. Try a trust
Trusts can move assets out of an estate, so they’re no longer counted when IHT is calculated. People can still decide who benefits, how, and when, making it a powerful but complex tool, so it important to get advice before acting.

3. Protect a partner
Married couples and civil partners can pass everything to each other tax-free – including property. But long-term partners who aren’t married or civil-partnered get no automatic IHT break. For some, making it official can be a savvy financial move.

4. Make a will and keep it sharp
A will gives control. Without one, an estate follows set rules and may face a bigger tax bill. An up-to-date will helps people make the most of exemptions to ensure that money goes where it should.

5. Investing in unlisted companies that qualify for Business Property Relief
These are typically inheritance tax-free after two years. Investing in unquoted businesses can be risky. However, unlike giving the money away, you retain control. From 2026 you will have an overall £1 million Business Relief Allowance. Anything in addition will be taxed at half the normal rate or 20 per cent.

6. Investing in an AIM independent savings account (ISA). ISAs are not inheritance tax-free. When you pass away, your loved ones could miss out on 40 per cent of your hard-earned cash. AIM ISAs are a popular, although much riskier way, for reducing this. Currently, AIM shares could be IHT free after two years. From 2026 the IHT will be halved to a rate of 20 per cent.