Rising UK Inheritance Tax Receipts Put Advice Under Spotlight

Amanda Cheesley Deputy Editor London 2 August 2022

Rising UK Inheritance Tax Receipts Put Advice Under Spotlight

The UK government's tax authority has released its annual inheritance tax receipts for the 2020-2021 financial year, showing a sharp rise on the previous years’ levels, prompting wealth managers to comment on reasons for the spike and what can be done to mitigate IHT liability.

Latest figures from the UK's tax authority, HMRC, show that inheritance tax revenues rose 14 per cent in 2019 to 2020 on the previous years’ level, reaching £6.1 billion ($7.4 billion). This is the largest single rise in IHT receipts since the 2015-16 financial year.

The number of people paying the tax rose by 4 per cent from the period before. The average inheritance tax bill for the 2019-20 tax year climbed by £7,000 from £209,000 to £216,000.

The rise in revenues and numbers of those paying the tax raises questions about what people can and should do to avoid IHT, and how rising asset values and inflation is dragging more people into the tax net. At present, the threshold before having to pay IHT is £325,000.

Here are reactions from advisors and lawyers on the matter. 

Alex Davies, chief executive of Wealth Club, a non-advisory broker of tax efficient investments:
“Clearly more people are being dragged across the threshold for inheritance tax and the bills are getting bigger, which is a kick in the teeth for many families picking up the tab. The idea that you work hard, save hard and pay taxes all through your life only to see nearly half of what you have accumulated taken by the state can be unpalatable."

"Inheritance tax rules are notoriously complicated, and even experienced investors can struggle to grasp them. But the good news is there are still a number of steps individuals can take to ensure they keep IHT bills to a minimum:

-- Give money away: Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax free on day one – as are certain smaller gifts. You can give unlimited amounts away but typically these take seven years to be completely inheritance tax free.

-- Invest in 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.

-- Invest in forestry: Buy a forest outright or invest in a fund and after two years, this will typically be IHT free. In addition, any income or gain in the value of the timber will be tax free.

-- Invest in an AIM ISA: ISAs are not inheritance tax free. When you pass away, 40 per cent of your hard-earned cash could line the government’s pockets instead of your loved ones. AIM ISAs are a popular way around this. They are riskier but after two years they could be IHT free.

-- Make a will: If you don’t, the law will decide how your estate is distributed and it certainly won’t be the most tax-efficient way."

Lizzie Murray, partner in the private wealth team, Saffery Champness
“The legacy of the Covid pandemic can be felt throughout the UK economy and the latest inheritance tax figures are no exception, with such a significant annual spike in IHT receipts for the year immediately following the pandemic year being an unhappy reminder of the real human impact of the virus on many families."

"The spike also likely reflects the general growth in asset prices leading up to that time, particularly stocks and shares and residential property. This was combined with the fact the IHT nil rate band has not been increased in line with inflation, so we can generally expect a greater number of estates to qualify for an IHT charge each year – a trend which is set to continue given the former Chancellor’s decision to freeze the IHT thresholds until 2026.”

"These factors together meant it was widely anticipated that there would be an increase in the 2021-22 IHT receipts, as the figures for the previous year had remained relatively steady. But a 14 per cent annual increase, the largest since 2015-16, is nevertheless very striking, particularly in the current political environment where there is heavy disagreement, including among the Conservative leadership candidates, over the role of taxation in addressing the country’s public debt, in the context of rising inflation and potentially stagnant growth."

"The difficult circumstances which have likely contributed to this spike in IHT receipts may only worsen the public’s perception of what is already an incredibly unpopular form of tax, despite it continuing to affect only a small proportion of estates. This could ultimately lead to more calls for the IHT regime to be reformed or even abolished, on the grounds that grieving families should be spared what seems like a punitive tax bill and the administrative headache that often accompanies it.”

Kyra Motley, partner, Boodle Hatfield, a private wealth law firm
"The average inheritance tax bill has hit a record high of £216,000 in the past year, from £209,000 the previous year, as fiscal drag pulls more estates under the scope of the tax."

"The government announced last year that the nil rate band for main residence relief will be frozen at £175,000 until 2025-26. In the past year alone, average UK property values have risen 10.7 per cent whilst inflation has hit 9.4 per cent. This process, known as ‘fiscal drag’ means that more people are becoming liable for inheritance tax."

"The introduction of the main residence nil rate band in 2017 had led to fewer estates being liable for IHT. However, the average tax bill has increased steadily year-on-year and the number of estates that owe inheritance tax has begun to creep up again."

"More and more people are being caught up in the inheritance tax net, with the average tax bill growing by a fifth within just four years. Inheritance tax was introduced as a tax to be paid by the very wealthy. This is no longer the case. Ordinary families are increasingly coming under the scope for inheritance tax at a time when soaring inflation means they can ill afford it.” 

Shaun Moore, tax and financial planning expert at wealth manager Quilter
“This increased tax take shows just how big an impact the ongoing freeze on the nil rate band and residence nil rate band has had. The freeze is certainly achieving the ‘fiscal drag’ it set out to, particularly given the rise in asset prices in the past couple of years since the depths of the pandemic. The rapid growth in house prices has no doubt played a major part in this increase and, as a result of continually rising prices, many more people could end up having to pay IHT unexpectedly."

"With many more people likely to face a hefty IHT bill in the coming years, it remains vitally important that people start to have conversations with their loved ones to fully understand their estate and the value of it sooner rather than later. While it is not always the easiest conversation to have, it is far better to have it now than during more emotionally challenging times such as following a death.”

"While the entire IHT take is small change for the government compared to other forms of tax, it is growing steadily and will always be in focus when it comes to the government looking for ways to plug holes in public finances. IHT is a complicated tax and one that requires a good level of knowledge to ensure you pay the right amount. In most people’s cases that will be nothing, but with house and other asset prices still on the rise, it is worth seeking professional financial advice to ensure you understand your estate and make the most of your allowances to help mitigate your IHT bill.”

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