The latest figures from HM Revenue and Customs (HMRC) show that inheritance tax receipts increased to £5.2 billion in the eight months from April 2023 to November 2023.
This is a £400 million increase from the same period in the previous year, and continues the upwards trend over the last decade.
Currently, one in every 25 or 4% of estates pay inheritance tax, but the freeze on inheritance tax thresholds, decades of house price increases and high inflation are bringing more and more estates above the threshold.
The IFS estimates that the proportion of deaths resulting in inheritance tax is set to grow to over 7% by 2032–33. The number of people affected by inheritance tax will be still larger.
By 2032–33, they predict that one in eight people will have inheritance tax due either on their death or their spouse or civil partner’s death.
Inheritance tax is typically paid at a rate of 40% over certain thresholds, although you can pass on money IHT free to your spouse or civil partner, who will then also inherit your allowance for when they pass away.
The main threshold is the nil-rate band and applies to the vast majority of people in the UK, enabling up to £325,000 of an estate to be passed on without having to pay any IHT. That has been unchanged since 2009.
However, there is also a Residence Nil Rate band worth £175,000 which allows most people to pass on a family home more tax efficiently to direct descendants, although this tapers for estates over £2 million and is not available at all for estates over £2.35 million.
Nicholas Hyett, Investment Manager at Wealth Club said, “The Treasury raked in an extra £5.2 million from inheritance tax from April to November 2023 and this number is increasing steadily, month after month, and year after year. Last year it raised more than £7bn for HMRC but could hit £9.5 billion before the end of the decade.
While just 4% of estates pay inheritance tax at the moment, freezing the nil-rate and residence nil-rate bands for years means people who would not have been considered wealthy in the past will end up getting caught out by this most hated of taxes.
For those that are picking up the ‘death tax-tab’, Wealth Club calculations suggest the average bill could increase to £233,000 this 2023/24 tax year, with over 30,000 families having to hand over part of their inheritance to the taxman.
This is a steep 9% increase from the £214,000 average paid just three years ago and a 12% rise in the number of estates paying the tax.
The good news is that there are still lots of legitimate ways to pass on money free of inheritance tax, which is why inheritance tax is referred to as a ‘voluntary tax’ in some circles.”