In the 2021/22 tax year, the government collected £5.99 billion in Inheritance Tax (IHT), the highest amount ever recorded.
This represents a 4% increase from the previous year. The rise has been attributed to various factors, including higher asset values such as property and investments. Additionally, more estates are now subject to IHT due to the government’s decision to freeze the tax-free thresholds until 2027/28. These thresholds determine the amount your loved ones can receive on your death before they have to pay IHT. Understanding how IHT may impact you and your family is more crucial than ever in light of these developments.
Why Are More Estates Being Taxed?
More estates are now subject to Inheritance Tax (IHT) because the threshold has stayed the same even as asset values have gone up. The Office for Budget Responsibility (OBR) predicts that IHT receipts will reach £9.7 billion by 2028/29. In 2021/22, 4.39% of UK deaths resulted in an IHT charge, the highest level since 2016/17. The introduction of the Residence Nil Rate Band (RNRB) in 2017 initially helped to offset the impact of rising property prices. However, it’s now frozen at £175,000 until 2027/28, leading more estates to exceed the tax threshold.
What has been the impact?
Inheritance Tax (IHT) can be a surprise for many families during an already difficult time. The average IHT bill for 2021/22 was £215,000, a significant amount that can reduce the inheritance left to loved ones. Despite the headline IHT rate being 40%, the average effective tax rate (AETR) was just 13%. This lower rate is due to various allowances and exemptions that can reduce the taxable value of an estate. Larger estates tend to pay a higher AETR, especially those valued between £1.5 million and £7.5 million, where the rate can rise to 24%. However, for the very largest estates, the AETR drops slightly, as these often make better use of available reliefs and exemptions, such as Business Property Relief (BPR), which can significantly reduce the amount of tax payable.
Why does planning matter?
Effective planning is key, as estates are more likely to be responsible for inheritance tax. The biggest exemption is for transfers between spouses and civil partners, allowing the entire value of an estate to be passed on without tax. In 2021/22, 34% of estates used this exemption, shielding £15.5 billion from tax. Other helpful reliefs include Agricultural Property Relief (APR) and Business Property Relief (BPR). These can lower the taxable value of specific assets, like farmland or business interests. More estates are using these reliefs to reduce their inheritance tax bill. It’s important to remember that inheritance tax planning isn’t just about reducing the tax bill. It’s also about ensuring your assets are passed on according to your wishes without unnecessary delays or complications. With careful planning, many people can greatly reduce or even eliminate their liability to inheritance tax.
