HMRC Reports New Record for Inheritance Tax Due to Inflation and COVID-19
Record-high inheritance tax (IHT) liabilities were driven by COVID-19, asset price inflation, and the government’s tax freeze, according to HM Revenue and Customs (HMRC).
Official data published on Wednesday show 4.39 percent of UK deaths in the year 2021–2022 resulted in an IHT charge, 0.66 percent higher than the previous year.
In the same year, the total amount of IHT payable was £5.99 billion, representing a 4 percent increase from the previous year and a 26 percent jump from a decade ago.
HMRC’s analysis suggests that the increase is likely due to a combination of factors, including higher volumes of wealth transfers following recent IHT-liable deaths, which were “at least in part caused by COVID-19,” recent rises in asset values, and the government’s decision to freeze IHT tax-free thresholds instead of adjusting them for inflation.
IHT is paid at a rate of 40 percent on the value of estates above a threshold of £325,000, which has remained unchanged since 2009. Additional allowances are available for transferring family homes to younger generations.
According to figures published in March by the Office for Budget Responsibilities (OBR), IHT paid in the year 2021/2022 was £6.06 billion, but the record was broken again in the following year when £7.09 billion was paid.
OBR forecasts suggest that the amount could reach £9.73 billion per year within five years.
Factors that could further impact the amount include changes to the non-domicile tax regime announced by the new Labour government, shifting IHT to a residence-based system from April 6, 2025. The Institute for Fiscal Studies estimates that by making some IHT allowances less generous, an additional £2.7 billion could be raised.
Chancellor Rachel Reeves has not confirmed potential changes to IHT, pension reform, or capital gains tax hikes, but has hinted at forthcoming “difficult decisions” in her autumn budget. Reeves aims to address a £22-billion budget hole discovered upon Labour’s entry to Downing Street and has already announced spending cuts.
The Treasury’s policy paper outlines the shift in IHT to a residence-based system, and despite potential reforms to inheritance tax allowances, past governments have generally avoided major changes to IHT.
