HMRC collected a record £6.1billion inheritance tax last year: who pays and how much?

HMRC collected a record £6.1bn in inheritance tax in 2021-22, a 14% jump on the £5.4bn collected the previous year.

It is the biggest single-year increase since the 2015-16 financial year, when revenue rose 22% (£848m). This means the average Inheritance Tax (IHT) bill has risen by £7,000 per estate to £216,000.

The total number of deaths in the UK resulting in a charge of IHT has also increased. HMRC data shows there were 23,000 such deaths in the 2019 to 2020 tax year. This represents a 4% increase on the previous year.

It’s a complicated subject, so let’s break down the major issues surrounding the so-called “death tax,” including who’s most likely to pay it and ways to lower the bill.

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Why do we pay more inheritance tax?

The IHT is a tax on the estate of a deceased person. This estate includes all their property, possessions and money saved or invested.

Everyone is entitled to a tax-free IHT allowance. But if the value of your assets exceeds it, it may be subject to IHT at a flat rate of 40%.

The increase in IHT invoices is the result of these non-taxable allowances. The zero-rate bracket (the total value of your estate that can be inherited tax-free) has been £325,000 since 2010-11. Most recent slice of residence at zero rate – the additional allowance granted on a principal residence – was first introduced at £100,000 in 2017 and has gradually increased each year to reach £175,000 in 2020-21.

Both allowances are expected to remain frozen until 2026, by which time IHT figures are expected to have reached £8.3bn, according to the Office for Budget Responsibility (OBR).

This is in addition to rising property prices, meaning that a growing number of people who were previously unaffected by IHT may soon find that their assets exceed their allowances.

  • Learn more: inheritance tax rates and deductions

Most people don’t have to pay

Despite the increase in the number of people, relatively few people have to worry about inheritance tax.

The latest HMRC data for 2019-20 shows that just 3.76% of all deaths in the UK resulted in a charge of IHT.

Most of the people who had to pay IHT had assets valued at over £1million. Properties of this value are quite rare. There were only 10,600, representing 3.8% of all estates – moreover, of these high-value estates, 1,200 still did not have to pay inheritance tax.

Legal ways to reduce inheritance tax

If your estate falls within the scope of the IHT, there are several steps you can take while you are alive to minimize the amount that will be paid to HMRC.

Take advantage of tax-exempt benefits

Everyone in the 2022-23 tax year enjoys a non-taxable inheritance tax abatement of £325,000 – known as the zero-rate band.

In addition, since April 2017, you can pay less inheritance tax when you leave owned by a family member. For the 2022-23 tax year, this transferable allowance is £175,000. Combined with the zero-rate bracket, this is a potential tax-free allowance of up to £500,000 per person.

If you are married or in a civil partnership, you can effectively double your allowances. This is because spouses do not have to pay IHT on assets left behind by their partner, and they also inherit the partner’s unused IHT allowance. This means a couple can potentially pass on an estate worth up to £1m tax-free after they die.

  • Learn more: inheritance tax for married couples and civil partners

Make gifts

Giving your money away while you are alive is a simple step people take to reduce inheritance tax.

No tax is due on the gifts you give, as long as you live seven years after giving them. If you were to die within that time, the IHT amount could instead be reduced due to ‘conical relief‘, as long as you survived at least three years after giving the gift.

You can give up to £3,000 in gifts each tax year without worrying about an IHT being imposed, split among the number of people you like. This is called your “annual exemption”.

You are also allowed to make unlimited donations of up to £250 to other people, as long as you have not used another allowance for the same person. You can also carry forward any unused annual exemption to the next tax year, but only for one tax year.

You can also avoid IHT on gifts of up to £5,000 for your child’s wedding, up to £2,500 for a grandchild or great-grandchild and up to £1,000 for any other person.

You also don’t have to pay inheritance tax when you give money to UK charities, political parties, the National Trust, registered housing associations, national museums and universities .

In addition, if you leave more than 10% of your taxable estate to one of these groups in your will, the inheritance tax rate for the rest of your estate will increase from 40% to 36%.

  • Learn more: zero-rated gifts

Other Ways to Reduce IHT

You can also reduce inheritance tax by putting your life insurance policy in trust, by writing a deed of amendment allowing your heirs to modify your will after your death, or by using a eqrelease of utility scheme to use money tied up in the property.

There’s a lot to consider for each of these options, so it may be worth consulting with an expert before jumping in.

  • Learn more: 7 ways to avoid inheritance tax

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