Inheritance tax payers reach record levels – but that doesn’t mean you’re going to have to pay it

A record number of estates paid a record amount of inheritance tax, the latest figures from HMRC reveal. 

However, the chance that you will have to pay it remains remarkably small.

In the last tax year for which HMRC has figures, 2016/17, 28,100 estates paid £5.4 billion in inheritance tax.

The number of estates liable for the tax increased 15% on the previous tax year and the amount collected rose by 3%.

The amount of inheritance tax paid has doubled in the last nine years. 

But while these headline figures may look alarming the reality is the proportion of estates on which inheritance tax is payable is very, very low.

In the UK in the tax year 2016/17 around 610,000 deaths were recorded. Of these, 249,000 estates were submitted to HMRC for a review of their IHT status. Of these, just 28,100 – or 4.6% - of estates ended up paying IHT.

*Figures rounded to the nearest 1,000. Source: HMRC, September 2019.

The percentage of estates that fall liable every tax year is creeping up (see table above). However, assuming the rules and limits stay the same, and the rate of growth continues at the same pace, it will take 72 years for an individual to face a one in four chance of incurring an IHT charge on their estate.

The current likelihood that an individual has of falling foul of IHT is one in 22.

Torsten Bell and Adam Corlett of the think tank the Resolution Foundation, noted the oddity of British taxpayers’ relationship with inheritance tax recently.

In their report Mr Bell and Mr Corlett said: “There are bad ideas, really bad ideas – and then there’s abolishing inheritance tax.

“Scrapping inheritance tax would give that small number of estates an average of £179,000 each. And even that average hides the fact that the tax cut would really be focused on the super-rich.

“If we’d abolished inheritance tax in 2015-16, 70% of the benefit would have gone to those with estates of over £1 million and a huge 40% to just 1,720 estates worth over £2 million – that’s 1,720 people being given an average tax cut of just over £1 million each.”

Moneywise contacted the government for comment on IHT. A Treasury spokesperson responds: “We think that only the very wealthiest in our society should be asked to pay inheritance tax on the assets built up over their lifetime.

"That’s why we introduced new thresholds in 2017 meaning married couples and civil partners will be able to pass on up to £1 million-worth of assets to loved ones before incurring any inheritance tax.

“The number of estates subject to the tax is forecast to fall this year as a result.”

If so few people pay it, why are we all so worried?

Some of the vitriol over inheritance tax is driven by the idea that one might face paying it. It is a real-world worry that the state might take 40% of what you’ve accrued over your lifetime, taking money straight out of the hands of loved ones.

This fear is compounded by the complexity of the rules and difficulty of estimating the value of an estate which might include illiquid assets that are difficult to put a particular price on, such as property.

The government has also introduced a series of rules and exceptions over a long period of time that make it harder to know when giving money away is necessary to reduce a bill or acceptable despite it.

Rules such as the annual gifting allowance, seven-year limits and the residential nil rate band muddy the waters and make people who quite likely don’t need tax planning more likely to seek it, out of fear.

The estate value at which IHT becomes liable has been frozen for more than a decade, at £325,000 is symbolic too, as it is the easiest part of inheritance tax to remember. Were the government to do this to income tax bands, the impact would be much more widely felt and popular opinion would turn quite quickly against the idea as pay rises crumbled under extra tax. While this fixed figure is to blame for more estates each year breaching the limits, it is a drip, not a flood. 

It is also philosophical, in that taxing what a person has earned, invested and saved over a lifetime is perceived by many to be unfair, especially when that person has likely already paid income tax, capital gains tax, stamp duty, and other taxes on that wealth beforehand.

While this is a reasonable criticism to make, the simple fact remains that very few people actually pay it. The chances that you may have to pay it in future are more dependent on the whims of future governments’ policy fiddling than an inexorable certainty that your estate will breach the limits.

Finally, inheritance tax is an emotive tax. No other duty has received a moniker like "death tax" or "death duties". It is an easy policy to scorn and besmirch as the grim reaper, come to confiscate your money. But the truth sits a long way from the emotional invocation it often receives.