The average inheritance tax (IHT) bill in the UK for the 2021/22 tax year has reached an unprecedented high of £215,000, reflecting a broader trend of increasing IHT burdens due to rising property prices and accumulated savings. Here’s a detailed analysis of the current situation and its implications:

Key Statistics and Trends

1. Increase in IHT Bills and Affected Estates:
   • The average IHT bill in 2021/22 rose to £215,000.
   • The number of estates paying IHT increased to 27,800.
   • The proportion of deaths resulting in an IHT charge rose to 4.4%, up from 3.7% the previous year.
2. Future Projections:
   • According to Wealth Club, the average IHT bill could rise to £248,000 in the current tax year (2024/25), affecting approximately 30,300 estates.
   • If current trends continue, the average IHT bill may nearly reach £290,000 by the end of the decade.

Contributing Factors

1. Rising Property Prices:
   • Property values have continued to increase, leading to higher estate valuations and, consequently, higher IHT liabilities.
2. Pandemic Savings:
   • Many individuals accumulated significant savings during the pandemic, further increasing the value of their estates.
3. Frozen IHT Thresholds:
   • The nil-rate band and residence nil-rate band thresholds have been frozen, meaning that as asset values increase, more estates exceed these thresholds and become liable for IHT.

Broader Impact

1. Impact on Families:
   • While IHT is often viewed as a tax on the wealthy, the growing number of estates liable for IHT suggests a broader impact. Wealth Club’s Nicholas Hyatt points out that the true number of families affected by IHT may be higher than reported, particularly when considering the transfer of assets between spouses without immediate tax liability.
2. Political and Fiscal Considerations:
   • There is no explicit government commitment to change IHT rates, but the freeze on tax bands effectively increases tax revenues without legislative action, making IHT a “stealth tax.”
   • This approach allows the government to increase its IHT revenue without incurring significant political costs.

Policy Implications

1. Potential for Reform:
   • The increasing IHT burden has led to discussions about potential reforms to make the tax system more equitable. However, significant changes appear unlikely in the short term given the political advantages of the current approach.
2. Planning and Advice:
   • Given the rising IHT bills, it is increasingly important for individuals to engage in effective estate planning to mitigate their tax liabilities. This includes making use of available reliefs and exemptions, considering lifetime gifts, and exploring other tax-efficient strategies.

Conclusion

The rising inheritance tax bills in the UK highlight the significant financial impact of current tax policies on estates, driven by increasing property values and frozen tax thresholds. As more families find themselves subject to IHT, the need for careful estate planning and potential policy reform becomes ever more pressing. The trend of increasing IHT liabilities is expected to continue, further underscoring the importance of addressing these issues both at an individual and policy level.