31 July 2024
If you are covering HMRC’s inheritance tax liability statistics, please see the following comment from Shaun Moore, tax and financial planning expert at Quilter:
"The latest figures from HMRC reveal yet another rise in inheritance tax (IHT) liabilities as more and more people pay what is often touted Britain’s most hated tax. For the tax year 2021 to 2022, 4.39% of UK deaths resulted in an IHT charge, marking an increase of 0.66 percentage points since the previous year. This means that IHT is now payable on the highest proportion of estates since the 2016 to 2017 tax year.
"Given the Labour government has remained tight-lipped surrounding its tax plans outside of its pledge not to increase income tax or national insurance we may soon see the IHT tax take increase even further.
"One of the primary factors driving the current increase is the rise in the number of taxpaying IHT estates. In the 2021 to 2022 tax year, there were 27,800 taxpaying estates, an increase of 800 from the previous year as more people get caught with wealth over and above the IHT thresholds. These figures are also heavily influenced by escalating property values and the government’s decision to maintain IHT thresholds at their 2020 to 2021 levels until April 2028.
"The total IHT liabilities for the 2021 to 2022 tax year amounted to £5.99 billion, representing a £230 million (4%) increase compared to the previous year. Given Chancellor Rachel Reeves’ comments about the blackhole in public finances, these higher tax revenues are likely going to be welcomed.
"One particular part of the data to highlight is the revenues that could be gained from agricultural and business property reliefs (APR & BPR) which are rumoured to be potential candidates for the chopping block. The combined value of these reliefs was £4.4 billion in the 2021 to 2022 tax year, an increase of £0.2 billion (5%) compared to the previous 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’. However, the unintended consequences could be huge especially for the AIM market which relies heavily on the shares being eligible for BPR after holding the shares for two years. This might therefore hamper Labour’s stated aim of getting more investment into UK plc.
"However, if we look to the data in today’s release around the average effective tax rate (AETR) on IHT-paying estates we can see that these types of reliefs are utilised by wealthy estates to lower the rate of IHT paid. The overall AETR for all taxpaying estate in the 2021/22 tax year was 13% despite a headline rate of 40%. However, the AETR varies drastically depending on the size of the estate. The largest estates, valued over £10 million, had an AETR of 20% which is 4% less than estates valued between £2 million and £7.5 million. This is primarily down to the greater utilisation of available exemptions such as APR and BPR. This highlights the regressive nature of the IHT system where smaller estate may bear a proportionately higher tax burden than significantly larger ones.
"Elsewhere in the data, despite its complexities the Residence Nil-Rate Band (RNRB) continued to play a crucial role in estate planning. Introduced in the 2017 to 2018 tax year, the RNRB provides an additional allowance for estates passing the deceased's main residence to direct descendants. For the 2021 to 2022 tax year, the RNRB was set at £175,000, the same as the previous year, following the government's decision to freeze the threshold despite huge property price rises. In 2021 to 2022, 25,800 estates utilised the RNRB, sheltering £6.5 billion of chargeable estate value from IHT, an increase of £0.4 billion from the previous year.
"A significant portion of the IHT burden is concentrated in London and the South East of England, which together account for over 50% of the total IHT liabilities in England. In the 2021 to 2022 tax year, these regions collectively contributed £2.7 billion in IHT liabilities, with London alone accounting for £1.3 billion and the South East for £1.4 billion. This disproportionate contribution is largely due to the higher property values and greater concentrations of wealth in these areas. Properties in London and the South East often exceed the IHT thresholds more frequently, pushing more estates into the taxable category with frozen thresholds not keeping up with price inflation.
"With the tax-free thresholds frozen and asset values continuing to rise, more estates are being drawn into the IHT net, creating a greater burden on families. Simplifying the tax, possibly by increasing the nil-rate band and revising the RNRB, could help create a fairer system for those with less wealth. Additionally, updating the gifting laws to reflect current inflation could incentivise lifetime giving, promoting smoother wealth transfers across generations may also be a sensible option. While IHT remains an essential source of revenue, thoughtful reform could address taxpayer concerns and support a more equitable transfer of wealth in the UK. However, only time will tell what Labour opts to do with the IHT system and we may see this tax become more punitive in years to come."
