Inheritance tax set to surpass 2006/07 peak 

Households paying inheritance tax are set to surpass the previous record within a couple of years, Rathbones, one of the UK’s leading wealth management firms, said today as HMRC published its latest official statistics covering the 2022/23 tax year. 

Rathbones estimates that 3,524 estates will be hit with IHT bills of over £500,000 by the end of the 2025–26 tax year, based on an average annual increase of 8.74%. This assumes the trend since 2022 continues but, given that pensions will soon be included, the firm said instead it is likely to increase.  

Rebecca Williams, Divisional Lead of Financial Planning at Rathbones, says: “Death is becoming an increasingly costly business. The number of estates paying IHT rose by 13% in the 2022/23 tax year and is rapidly approaching the 2006/07 peak. It is on course to surpass that milestone before the end of the decade – even before factoring in the inclusion of pensions in IHT calculations from April 2027. 

“For ordinary families, simply inheriting a grandparent’s home - which they lived in all their lives and is now worth a tidy sum - can be enough to be on the hook for IHT bill.” 

“Adding to the distress, families are often forced to navigate complex IHT rules while mourning the loss of a loved one. And grieving families will be dragged further into this web of complexity once pensions are brought into the IHT net from April 2027. It’s no surprise that the nation’s most hated tax is becoming even more despised. 

Surviving partner benefit

“Although fewer than 5% of all deaths currently result in an IHT bill, this figure is misleading. That’s because no tax is usually paid on the first death if the estate passes to a surviving spouse or civil partner. In reality, closer to one in ten families will ultimately face an inheritance tax bill - most commonly after the second partner in a couple dies. 

“It is not surprising that more IHT is collected from women’s estates than from men’s. This is unlikely to be due to women being wealthier or men being more effective at tax planning. A more probable explanation lies in women’s longer life expectancy. In many cases, the tax liability only arises after the second death in a couple - and statistically, this is more often the wife. 

IHT burden on the rise

“While the IHT tax take is a minnow compared to income tax, the upcoming policy changes and the continued freeze in thresholds mean that the Treasury will increasingly claim a larger slice of the so-called ‘great wealth transfer’ in the years ahead. And given the government’s pressing need to refill the public coffers, it’s entirely possible the deep freeze on IHT thresholds could be extended beyond 2030. 

“If you want to maximise the wealth you pass to the next generation early financial planning is key. A professional adviser can help you understand the extent of the potential bill and work with you to mitigate tax without jeopardising your own financial security.” 

*Based on a recent freedom of information request by Rathbones which revealed that nearly one in 10 estates liable for inheritance tax (IHT) paid over £500,000 in the latest available year. 

• In the 2021/22 tax year, 2,520 estates paid more than £500,000 in inheritance tax (IHT) – a 29% increase over three years.
• If trend seen over three years to the end of 2021/22 continues, over 3,524 estates will pay more than £500,000 in IHT by end of current tax year (2025/26), based on an average annual increase of 8.74%.