Inheritance Tax Sees Significant Rise: Record Liabilities Highlight Growing Concern

The UK is witnessing a surge in inheritance tax (IHT) subjects, with the number of estates impacted jumping in the 2022/23 tax year. With total IHT liabilities hitting a staggering £6.7 billion, this reflects a 12% increase compared to the previous year, as reported by HM Revenue & Customs on July 31.

The Rising Tide of Inheritance Tax

This notable rise in IHT liabilities can be attributed to several factors, particularly the freezing of tax thresholds and increasing asset values. As property prices and investments continue to climb, more families find themselves entering the IHT net, resulting in greater financial burdens for the bereaved.

Key Statistics:

• Estates Subject to Tax: Approximately 31,500 estates were liable for IHT, marking a 13% increase from 2021/22.
• Death Triggers: Around 4.62% of all deaths in the UK resulted in an IHT charge, equating to figures last seen in 2016/17, albeit still below the peak of 5.96% recorded in 2006/07.

Expert Insights on the Growing Tax Burden

Ian Dyall, head of estate planning at Evelyn Partners, asserts that the increasing number of families facing IHT liabilities signifies a worrying trend. “More families are incurring inheritance tax liabilities and more assets in each estate are becoming subject to tax,” he noted. The frozen nil-rate bands offer diminishing protection as valuations rise, pushing families who fail to act into a more significant tax bracket.

Forecasts Indicate Further Increases

Looking ahead, the government’s Office for Budget Responsibility (OBR) anticipates further increases in IHT receipts, projecting:

• £8.4 billion for the fiscal year 2024/25
• £9.1 billion for 2025/26

Following planned reforms in the Autumn 2024 Budget, it’s estimated that annual receipts could reach £14.3 billion by 2029/30. These reforms will introduce several significant changes, including the inclusion of defined contribution pensions in estates for IHT purposes starting April 2027.

Implications of Upcoming Reforms

Businesses and agricultural property will also face tighter regulations from April 2026, restricting the exemption to the first £1 million of combined assets, with a 20% tax imposed on the remainder. Dyall emphasizes that while IHT impacts an expanding range of households, it remains predominantly shouldered by the wealthiest families.

“Approximately 6,400 families with net wealth surpassing £1.5 million contributed £4.3 billion, constituting 64% of the total,” he elaborated. The prospect of increased taxes could potentially motivate high-net-worth individuals to seek residence outside the UK or adopt strategies to mitigate their tax exposure.

Strategies to Mitigate Inheritance Tax

As families confront greater liabilities, more are likely to engage in gifting strategies and seek estate planning advice to navigate the complex landscape of inheritance taxes. Dyall foresees potential reforms targeting these solutions as the Treasury looks to optimize tax revenues.

The Importance of Reliefs and Their Future

Statistics affirm the growing significance of reliefs available under current law, with business and agricultural property reliefs amounting to £5.28 billion in 2022/23—an increase of £860 million year-on-year. Dyall highlights that while the use of these reliefs can be often opportunistic, their long-term implications will unfold over the coming years amidst tightening regulations.

The Impact on Families

Sarah Coles, head of personal finance at Hargreaves Lansdown, also commented on the growing trend of families being caught unaware by IHT. “The frozen threshold is significantly impacting families as rising house prices push many beyond the tax barrier,” she explained, emphasizing the vulnerability of widowed individuals often facing IHT liabilities.

Coles warned about the significant financial implications that could emerge from the inclusion of pensions in estate calculations from 2027. “Those who have diligently preserved their pension pots may find themselves unfairly penalized after their passing.”

Financial Shifts Indicating a Wider Trend

Marc Acheson, a global wealth specialist at Utmost Wealth Solutions, echoed these concerns, indicating that the trend of expanding IHT nets began prior to the impending reforms in 2024. With the OBR predicting that nearly 10% of deaths may incur IHT liabilities by the end of the decade, many affluent individuals are already choosing to relocate to safeguard their wealth.

Closing Thoughts

The increasing burden of inheritance tax highlights the urgent need for families to evaluate their financial planning strategies. As the UK tax landscape continues to evolve, those impacted by IHT should proactively seek targeted advice to navigate this complex environment effectively.

This comprehensive overview of the rise in inheritance tax aims to ensure that families remain informed and adequately prepared in a rapidly changing financial landscape.