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UK inheritance tax captured a record £6.7bn in 2022-23, as rising asset values and a long-running freeze on the tax-free threshold meant greater numbers of estates paid the levy.
HM Revenue & Customs on Thursday disclosed that 31,500 estates paid the levy in 2022-23, a 13 per cent rise. The amount of IHT due rose by a similar amount — 12 per cent — from £6bn in 2021-22.
The figures show how the UK government has been reaping increasing revenue from the 40 per cent duty on inherited assets, even before the dramatic changes chancellor Rachel Reeves announced last October.
She has curbed to varying degrees previous inheritance tax reliefs for business assets, farms, unspent pension pots and shares on London’s AIM index for smaller companies.
“While these latest figures show a fairly modest rise in the number of estates subject to inheritance tax in 2022-23, we’re likely to see many more people dragged into the IHT net when seismic changes to the regime come into force from 2026,” said Ben Handley, a tax partner at BDO.
Inheritance tax is charged at a rate of 40 per cent above a tax-free amount of £325,000 per person. There is also an additional £175,000 allowance given if passing a main residence to direct descendants.
The main tax-free allowance has not changed since 2009, meaning that in real terms it has fallen significantly. The additional allowance, first introduced in 2017, has been frozen since 2020-21.
Despite the headline 40 per cent levy, the average effective tax rate paid by affected estates in 2022-23 was 13 per cent, as a result of various reliefs, exemptions and tax-free allowances.
Overall, 4.62 per cent of UK deaths resulted in an inheritance tax charge in 2022-23, an increase of 0.23 percentage points.
The Office for Budget Responsibility has forecast that 9.5 per cent will be subject to IHT by 2029-30.
“As asset prices, especially equities and property, continue to rise the frozen nil-rate bands offer less and less protection against IHT,” said Ian Dyall, head of estate planning at Evelyn Partners, a wealth management firm.