The Exchequer raked in a record £6.7bn in inheritance tax between 2022 and 2023, as a longstanding freeze on the tax-free threshold and ballooning asset prices meant more estates were sucked in to paying the unpopular levy.
The overall earnings from inheritance tax rose by over £700m in the tax year 2022/3, official data showed, a year on year jump of 12 per cent.
HMRC attributed much of the added haul derived from more estates becoming liable to the duty thanks to thresholds remaining frozen at £325,000 since 2021.
As many as 13 per cent more households were liable to the levy in the most recent official numbers from the UK’s customs authority, taking the total number of estates that paid an IHT bill to 31,500.
The figures, which come on the back of a similarly large jump in the 2021/22 year, are the latest evidence of the tax making up an increasingly large share of Treasury earnings.
Receipts have more than doubled in the space of a decade, and are expected to rise even more sharply in the coming years, after the Chancellor removed several reliefs on the levy at her maiden Budget last October.
Budget to drive higher inheritance tax bills
The majority of additional revenues – due to kick in 2027 – will come from the government’s telegraphed move to bring pension pots into the scope of inheritance. Until Rachel Reeves’ maiden fiscal event last year, savers’ nest eggs had escaped being subject to the levy.
Claire Trott, head of advice at St James’s Place, said that change alone was likely to mean an additional 10,500 estates will pay inheritance tax; a 55 per cent increase over just five years.
The government also chose to end the decades-old Agricultural Property Relief and Business Property Relief carve-outs, that had previously allowed owners of farmland and family businesses to pass down their assets without paying the levy.
They are expected to raise a further £500m annually for the Treasury. But the changes proved immensely unpopular and sparked a string of protests across the country. Farmers and Labour’s political opponents branded the overhaul the ‘family farm tax’, and a cross-bench group of MPs recently called for the changes to be delayed by a year, while families adjusted their tax affairs.
Pete Fairchild, head of private clients at professional services firm Crowe, said the swath of changes had resulted in abrupt behavioural responses from clients looking to adjust formerly tax-efficient plans.
“More individuals are reverting to seeing their pension pot as a vehicle to provide income in retirement, as opposed to an IHT planning opportunity,” he said. “We are seeing more lifetime giving as people look to pass on their wealth and survive seven years to reduce their chargeable estate.
“Many clients have taken their 25 per cent tax-free lump sum from their pension and gifted that immediately to their children.”