Inheritance tax payments on the rise

Inheritance tax payments for April 2022 to February 2023 reached £6.4 billion – almost £1 billion higher than the same period a year earlier.

The Government’s monthly report of HMRC tax receipts has revealed inheritance tax (IHT) receipts soared by £0.9 billion for the period April 2022 to February 2023. This represents a 17% increase on the same 11 months a year earlier.

Meanwhile, capital gains tax (CGT) payments have also risen. The Treasury received £17.4 billion in CGT between April 2022 and February 2023 – a 23% rise compared to the same period the previous year.

What has caused the rise in inheritance tax payments?

The report included analysis of patterns for IHT payments from 2019 to 2023.

The Government said receipts in April 2019 were particularly high because of announcements (and subsequent delays and cancellations) of rises to probate fees in England and Wales. It said this probably caused executors to bring forward tax payments to avoid the prospective higher fees.

There were also higher payments in October to November 2020, March to August 2021, and March 2022. The Government said this was because of a combination of factors, such as higher volumes of wealth transfers during the Covid-19 pandemic, rises in asset values, and the March 2021 decision to maintain the IHT tax-free thresholds at their 2020 to 2021 levels up to and including 2025 to 2026.

An overview of inheritance tax

Inheritance tax is a tax on the estate (the property, money and possessions) of someone who’s died.

There’s normally no IHT to pay if either:

• The value of your estate is below the £325,000 threshold
• You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

The standard IHT rate is 40%, which is only charged on the part of your estate that’s above the threshold. And you may still need to report the estate’s value even if it’s below the threshold.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000.

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.

What else has the tax receipts report revealed?

Total HMRC receipts for April 2022 to February 2023 are £722.6 billion – a £66 billion increase on the same period a year earlier.

However, it’s worth bearing in mind that the monthly cash receipts data from April 2022 is provisional until it’s aligned to the HMRC Annual Reports and Accounts for 2022 to 2023.

Our thoughts

A key reason for the rise in inheritance tax payments is the continued freeze on the tax-free IHT thresholds. This, combined with inflation, puts more and more estates above the threshold, meaning many families and other beneficiaries are left facing large tax bills.

And although the rates for inheritance tax and capital gains tax remain static, it’s likely that both IHT and CGT payments will increase over the next few years. That’s because of the freeze to the IHT threshold, and the cut to the CGT tax-free allowance from £12,300 to £6,000 in 2023-24 and then to £3,000 from April 2024. As a result, more people will find themselves liable for these taxes.