The government has raked in record amounts of inheritance tax, as soaring house prices and frozen thresholds force more households into the net.
Annual figures from HM Revenue & Customs revealed a 16% increase, equating to £800 million, in tax liabilities created between the 2019/2020 and 2020/2021 tax years to £5.76 billion. This is the largest single-year rise in IHT liabilities since 2014/2015, when tax liabilities rose by 25%. The average liability per estate in the 2020/2021 tax year was £214,000, HMRC said.
Tax liabilities are now at their highest level on record, surpassing the previous peak of £5.05 billion in 2016/2017. The government said the rise was driven by the knock-on effects of the Covid-19 pandemic, as well as the continued rise in asset values. The number of deaths in the UK rose from 612,000 to 722,000 between 2019/2020 and 2020/2021.
The figures also revealed a 17% jump in the number of estates paying inheritance tax. In the tax year 2020/2021, there were 27,000 taxpaying IHT estates, up 4,000 on the previous year.
Ian Dyall, head of estate planning at Evelyn Partners, said: “Given the steadily rising tide of IHT receipts taken by the Treasury, driven in large part by frozen nil-rate band thresholds and rising asset prices, it’s perhaps not surprising that this already unpopular tax is now widely regarded as another ‘stealth tax’.
“There was undoubtedly a Covid mortality effect on the IHT tax take in the period addressed by this data, but more up-to-date statistics do show that annual IHT receipts have continued to surge. As the nil rate band of £325,000 and the residential nil-rate band of £175,000 have not been increasing with inflation – as many tax thresholds used to – and are not due to [do so], more families and more assets have been dragged into the IHT net thanks to rising property prices and investment asset values.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, echoed the sentiment: “The terrible toll of the COVID-19 epidemic looms large in these figures with 4,000 extra deaths resulting in an IHT liability. As such you would expect numbers to fall back as the pandemic’s grip lessened but in the following years, we’ve seen the IHT tax take continue to soar. In 2021-22 it increased to £6.1bn and provisional figures for 2022-23 show receipts hit an eye-watering £7bn.
“Transferable nil rate bands between spouses and the residential nil rate band have been hugely useful but have failed to keep pace with rising asset values, leaving more and more people exposed to potentially massive bills.”
The data showed that the most used relief was the exemption between spouses and civil partners, which sheltered £15.7 billion of assets from tax. This exemption was used by 36% of estates above the nil rate band, but was worth 71% of the total value of reliefs and exemptions set against assets.
The second most valuable relief was business property relief (BPR), a relief on the value of unlisted companies designed to protect them from inheritance tax.
BPR was used by 3,380 estates and protected £3.2 billion of assets from inheritance tax, a significant jump on £1.3 billion the previous tax year.
Dyall said: “BPR is a relief that has been under scrutiny in recent reports that have proposed potential changes to inheritance tax. The accusation is that BPR is being used as a tax planning tool – with investments in, for instance, AIM shares – rather than for its intended purpose of protecting small businesses. The increase in its usage could add fuel to that fire, and could also be evidence that savers seeking protection from IHT are taking more investment risk.”
Jon Sullivan, IHT advice policy consultant at Wesleyan, added he didn’t see the situation changing, “even if property prices begin to slide in the short term.
“It’s an unpopular tax – but which taxes aren’t – and with the right advice and careful planning IHT can be avoided. We’ve seen very little change to reliefs and allowances since the introduction of the Residence Nil Rate Band in 2017, and the complete removal of tax revenue bringing in billions every year seems very unlikely. Anyone concerned that the taxman might become an unwelcome heir to their wealth should seek advice now.”
