HMRC collected a record £6.1bn inheritance tax last year: who pays, and how much?

HMRC collected a record £6.1bn in inheritance tax in 2021-22 – a jump of 14% on the £5.4bn collected in the previous year.

It is the largest single-year rise since the 2015-16 financial year, when receipts rose by 22% (£848m). It means the average inheritance tax (IHT) bill has increased by £7,000 per estate to £216,000.

The total number of UK deaths that resulted in an IHT charge has also increased. HMRC data shows there were 23,000 such deaths in the tax year 2019 to 2020. That’s an increase of 4% on the previous year.

It’s a complicated subject, so let’s unpick the main issues around the so-called ‘death tax’ – including who is most likely to pay it, and ways you can reduce the bill.

Why are we paying more inheritance tax?

IHT is a tax on the estate of someone who has died. That estate includes all of their property, possessions and saved or investment money. 

Everyone is entitled to a tax-free IHT allowance. But if the value of your estate exceeds it, it may be subject to IHT at a flat-rate of 40%.

The increase to IHT bills is a result of these tax-free allowances. The nil-rate band (the total value of your estate that can be inherited tax-free) has been at £325,000 since 2010-11. The newer residence nil-rate band – the extra allowance given on a main home – was first introduced at £100,000 in 2017 and increased incrementally each year until it reached £175,000 in 2020-21. 

Both allowances are due to remain frozen until 2026, at which point IHT figures are predicted to have risen to £8.3bn, according to the Office for Budget Responsibility (OBR).

This is coupled with rising property prices, which means an increasing number of people who were previously unaffected by IHT may soon find their estates exceed their allowances. 

• Find out more: inheritance tax rates and allowances

Most people don't have to pay

Despite the rising numbers, relatively few people need to worry about inheritance tax. 

The latest HMRC data for 2019-20 shows that just 3.76% of all UK deaths resulted in an IHT charge.

Most of the people who had to pay IHT owned estates valued at more than £1m. Estates of this value are pretty rare. There were only 10,600, representing 3.8% of all estates – plus, of those high-value estates 1,200 still did not need to pay any inheritance tax.

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Legal ways to reduce inheritance tax

If your estate comes under the scope of IHT, there are several steps you can take while you're alive to minimise how much will be paid to HMRC.

Make use of tax-free allowances

Everyone in the 2022-23 tax year has a tax-free inheritance tax allowance of £325,000 – known as the nil-rate band.

In addition, since April 2017, you've been able to pay less inheritance tax when leaving property to a family member. For the 2022-23 tax year, this transferable allowance is £175,000. Combined with the nil-rate band, that's a potential tax-free allowance of up to £500,000 per person.

If you're married or in a civil partnership, you can effectively double your allowances. That's because spouses don't have to pay IHT on any assets left from their partner, and they also inherit the partner's unused IHT allowance. This means a couple can potentially pass on an estate worth up to £1m tax-free after they die.

• Find out more: inheritance tax for married couples and civil partners

Make gifts

Giving your money away as a gift during your lifetime is a simple step people take to reducing inheritance tax. 

No tax is due on any gifts you give, as long as you live for seven years after giving them. If you were to pass away within that time frame, the IHT amount may instead be reduced due to 'taper relief', so long as you survived at least three years after giving the gift.

You can give up to £3,000 worth of gifts each tax year with no worries of any IHT being charged, split between however many people you like. This is known as your 'annual exemption'. 

You're also allowed to make unlimited gifts of up to £250 to others, too – as long as you have not used another allowance on the same person. You can also carry any unused annual exemption forward to the next tax year, but only for one tax year.

You can also avoid IHT on gifts up to £5,000 for your child's wedding, up to £2,500 for a grandchild or great-grandchild, and up to £1,000 for anyone else.

You also don’t have to pay inheritance tax when you give money to UK charities, political parties, the National Trust, registered housing associations, national museums and universities.

What's more, if you leave more than 10% of your taxable estate to one of these groups in your will, the inheritance tax rate for the rest of your estate will fall from 40% to 36%. 

• Find out more: tax-free gifts

Other ways to reduce IHT

You can also reduce inheritance tax by putting your life insurance policy under trust, drawing up a deed of variation that allows your heirs to alter your will after death, or using an equity release scheme to make use of money tied up in property. 

There's a lot to consider for each of these options, so it might be worth consulting a specialist before you go ahead. 

• Find out more: 7 ways to avoid inheritance tax