The UK government collected a record £6.7 billion in inheritance tax during the 2022-23 tax year, driven by rising property and asset values and a static tax-free threshold.According to HM Revenue and Customs, 31,500 estates were liable for inheritance tax in 2022-23, an increase of 13% compared to the previous year. The total tax collected also rose by 12%, from £6 billion in 2021-22.
This increase occurred before significant changes to inheritance tax rules, announced by Chancellor Rachel Reeves in October 2023, took effect.
The government has since introduced reforms that limit previous tax reliefs on business assets, agricultural land, unspent pension funds, and shares listed on the Alternative Investment Market (AIM) for smaller companies.
Inheritance tax is applied at a rate of 40% on estates valued above a tax-free threshold of £325,000 per person. An additional allowance of £175,000 is available when a main residence is passed to direct descendants.
The primary tax-free threshold has remained unchanged since 2009, resulting in a real-terms reduction due to inflation. The residence allowance, introduced in 2017, has been fixed since 2020-21.
Projections from the Office for Budget Responsibility (OBR) indicate that by 2029-30, 9.5% of estates will be subject to inheritance tax, generating over £14 billion annually.
IHT Challenges for Long-Term Financial Plans
Inheritance tax poses significant challenges for families aiming to pass on their estates, particularly for those with assets above the thresholds.
The tax-free threshold of £325,000, unchanged since 2009, has not kept pace with inflation or rising property values, meaning more estates are now subject to the levy. This is why the government collects more every year.
This static threshold also erodes the real value of the allowance, catching middle-class families who may not consider themselves wealthy. The complexity of rules, including reliefs for business or agricultural assets, adds further uncertainty, especially after recent reforms tightened these exemptions.
For long-term financial planning, this creates difficulties in predicting future tax liabilities, as asset values may continue to rise while thresholds remain frozen. Families risk losing a significant portion of their legacy, which can disrupt plans to support future generations.
A financial planner can assist by developing strategies to mitigate this impact. They may recommend gifting assets during one’s lifetime, as gifts made more than seven years before death are typically tax-free.
Qualified planners can guide families through complex reliefs, such as those for business or agricultural property, ensuring compliance while maximising available exemptions. By planning early, families can preserve more of their estate for their loved ones.
If this blog has raised any questions why don't we have a quick chat?
MD & Certified Financial Planner
A brief meeting might be of interest, especially if you’re unsure just how wealth management and financial planning could help you.
It would only require the investment of an hour or so of your time, and the coffee’s not bad either.