Almost one in 10 estates are paying more than £500,000 in inheritance tax, with the number set to rise from 2027 when pensions are brought into the scope of IHT.
A new freedom of information request by Rathbones found that of the 27,850 estates liable for IHT in the 2021/22 tax year, 1,630 paid between £500,000 and £999,999 in IHT, while a further 890 estates paid over £1 million.
This totals over 2,520 estates, 9% of all estates in the same year liable for inheritance tax. It marks a 29% increase from the figure recorded at the end of the 2018/19 tax year.
If this trend continues, Rathbones estimates that 3,524 estates could pay over £500,000 in IHT by the end of the current tax year 2025/26.
Rebecca Williams, divisional lead of financial planning at Rathbones, said: “More and more people will be caught out by IHT charges, despite the availability of gifting allowances and the seven-year rule.
“The deep freeze on both the main nil-rate band and the residence nil-rate band, unchanged since 2009 and 2017 respectively, has led to a creeping form of fiscal drag. As house prices and asset values have steadily risen, more estates are being brought into the IHT net simply because the thresholds haven’t kept pace with inflation.”
Williams warned that the situation is set to worsen from April 2027, when pension assets are brought into the fold and the change could pull even modest estates into scope for IHT.
“Without proactive steps, more estates will find themselves facing IHT bills they might not have anticipated,” Williams said.
Additional research by Rathbones on the impact of the Government’s plans around IHT found that nearly one in three (31%) people with pensions say they are put off making further contributions to their pension pots by the changes.
The money they are no longer contributing to their pensions is most likely to be put in cash, with two in five (39%) questioned stating they will deposit the money in savings accounts, while 25% plan to invest some of the money in equity ISAs.
Almost one in seven (14%) questioned say they have already changed their focus to property investment as a result of the decision.
Rathbones said there was a growing awareness among parents and grandparents of IHT and a need to find ways to support family during their lifetime.
Williams added: “Conversations with clients show a real desire to help younger generations now, particularly with education and getting onto the property ladder, while safeguarding their own long-term financial security, and these changes add an extra layer of complexity to wrestle with.
“The Bank of Mum and Dad is under pressure, clients are walking a line between supporting children today, having enough for later life care tomorrow and not wanting to give the Treasury too much of their hard-earned wealth on death.”
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