Last year, the total amount of inheritance tax paid stood at £8.3 billion a year but, by 2030/31, it’s expected to balloon to £14.5 billion, according to Budget documents.
That means that even though inheritance tax wasn’t significantly increased in the Budget – as many feared – more families are likely to be affected.
Find out what’s happening and how you can prepare.
What’s on this page?
Budget papers reveal more families will pay IHT
Why IHT receipts are ballooning
What you can do
What to think about first
Budget papers reveal more families will pay IHT
There were no big changes for inheritance tax in this year’s Budget. The only significant news for most people was an extension to the freeze on nil rate bands for a further year, to 2031.
This includes the standard £325,000 nil rate band and the £175,000 residence nil rate band which can be claimed if you are passing a family home to direct descendants. But while feared restrictions on the amounts that can be gifted IHT-free didn’t materialise, the Budget documents revealed a huge increase in predicted IHT receipts.
And it’s not just individual tax bills that are set to rise. More families can also expect to face a bill when loved ones die. This year the number of taxable estates is expected to be 32,200, which is 9,000 fewer than previously predicted, and equivalent to about 1 in 20 estates.
That will rise to 63,100 by 2030/31, which is about one in 11 estates, according to the Office for Budget Responsibility.
James Scott-Hopkins, founder of wealth management firm EXE Capital Management, says: “We know that the number of families being dragged into the inheritance tax net will [almost] double by 2031, with the OBR forecasting that by the start of the next decade, 9.3% of all deaths will be subject to IHT.”
Why IHT receipts are ballooning
Rising IHT bills have largely been the result of frozen thresholds and rising asset prices, including family homes.
Scott-Hopkins says: “Receipts are already at record highs because of decades of house price rises and the insidious freezing of the NRB threshold, which has been stuck at £325,000 since 2009. In that time, the consumer prices index (CPI) has risen by approximately 60%, the average house price by 73%, and the average portfolio (made up of equities and bonds) by 139%.”
Although the nil rate band has been the same since 2009, the additional threshold (the residence nil rate band) was introduced in 2017 at a rate of £100,000, and increased each year until it rose to its current rate of £175,000 in 2020. But since then, the number of estates being affected and the amounts being paid have been rising steadily.
The amounts paid are expected to rise even faster in the coming year as upcoming changes (announced in last year’s Budget) come into effect.
Madeleine Beresford, partner at TWM Solicitors, says: “In addition to the fiscal drag we’ll see from the extended freeze to the nil rate band, over the next six to 18 months we will also start to see the impact of last year’s changes in terms of the restrictions on agricultural and business property relief, and also the pensions being brought into the IHT net.”
From 2027, unused defined contribution pension pots will be treated as part of the estate for IHT purposes.
Beresford adds: “The pensions point is hugely significant, not only because of the tax on the pension itself, but the fact it takes many people over the £2m threshold for the residence nil rate band.” RNRB is withdrawn at a rate of £1 for every £2 over £2m, which means that some estates going over that level could face an effective tax rate of up to 87%.
Rob Morgan, chief investment analyst at Charles Stanley, adds: “Once a tax reserved only for the nation’s wealthiest families, IHT has now planted its flag firmly in Middle Britain thanks largely to a potent mix of house price growth, frozen thresholds, and soon the inclusion of pension pots in the calculations.”