In the 2021/22 tax year, 4.39% of deaths in the UK met the £325,000 estate threshold to be taxable, which is the highest proportion it has been since 2016/17.
There were 27,800 deaths during the 2021/22 financial year that had taxpaying estates, which is a rise of 3% on the year before. The level of inheritance tax paid in 2021/22 was 4% higher than in the previous year.
The increase, which added up to the £5.99bn paid on IHT, is heavily attributed to the freezing of the tax-free threshold by the Government from March 2021 to autumn 2022.
Other factors included a mixture of rises in asset values and a hike in sizeable wealth transfers following the death of someone who has an IHT-liable death, according to the Treasury.
The tax included on the estate worth over £325,000 is 40% and is only charged for part of the estate that is above the threshold. However, individual homeowners can leave properties worth up to £500,000 completely IHT-free.
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This is because on top of the nil-rate band (up to £325,000), there is also a main residence nil-rate band standing at £175,000.
The former Conservative Government confirmed in its Autumn Statement in 2022 that those IHT bands will remain until 2028, after initially standing until 2026.
During the 2021/22 tax year, the biggest exemption against assets was between spouses and civil partners, which added up to £15bn. This level was slightly lower than the previous year (0.1%) and was used by 21,800 estates who paid above the nil-rate bond.
Meanwhile, the average amount paid on all taxpaying estates reached £215,000 in 2021/22.
Since then, the sums for the IHT paid have continued to soar in the UK. Between April and June, IHT levels racked up to £2.1bn – £83m higher than at the same time in 2023.
‘IHT could be soft target for an October hike’
Sarah Coles, head of personal finance at Hargreaves Lansdown, said that the number of families “dragged into paying tax” will continue to rise, as the Government figures only take into account the first year of the tax-free threshold freeze.
Coles said: “The nil-rate bands have been held until 2028, so rising asset values and house prices in the interim will mean thousands more pay tax.
“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.
“The scale of the money involved won’t dampen speculation that inheritance tax could be considered a soft target for a hike in the October Budget.”
‘Higher revenues likely to be welcomed’
Shaun Moore, tax and financial planning expert at Quilter, pointed to the surge in agricultural and business property reliefs (APR and BPR) and how it could impact the new Government and the “most hated” IHT.
He said: “Combined, BPR and APR added up to £4.4bn in the 2021/22 tax year – a rise of £0.2bn in a year. Even clawing back a percentage of this tax revenue would go some way to helping refill public coffers.
“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’.”
He added: “Given Chancellor Rachel Reeves’ comments about the black hole in public finances, these higher tax revenues are likely going to be welcomed.”
