Government income from ‘death tax’ set to rise 25% as more families hit

The Government is expected to rake in £7.5 billion from Britain’s ‘most hated tax’ this year – up 25 percent in just three years. The figures come from a new analysis of how much the government will receive from the estates of the dead through Inheritance tax.

Data released from the HMRC revealed that Britons paid a record £6 billion in IHT in the 2021/22 financial year, which is the most recent official audited figure.

Experts at Wealth Club have used this and trend data to suggest the total will rise by some 25 percent to £7.5 billion for the current – 2024-25 – financial year.

However, it is expected that Labour will change the rules around inheritance tax to rake in billions of pounds more, perhaps as early as a Budget in October.

Among the options on the table are scrapping the ability of people to pass on their pension pots free of tax if they die before the age of 75.

Wealth Club said that some 27,800 estates paid IHT in 2020-21, but it expects this rise to 30,300 in the current year. The average figure paid in IHT was £215,000 in 2021, however this bill is expected to hit an average of £248,000 this year.

Nicholas Hyett, Investment Manager at Wealth Club, said: “Rising property prices and savings built up over the pandemic, together with frozen inheritance tax thresholds, continues to drive increases in the number of people paying inheritance tax.

“An average bill of £215,000, is already eyewatering, but Wealth Club research suggests it could hit £248,000 in the current tax year and nearly £290,000 by the end of the decade if the current rules remain unchanged.”

Mr Hyett said: “It’s tempting to see inheritance tax as a problem restricted to the mega wealthy, since only around 1 in 24 deaths result in an inheritance tax charge.

“However, not only is the number of people facing this most hated of taxes growing all the time, but that number is probably misleadingly low.

“Since spouses can pass assets between each other without creating an inheritance tax liability, the number of couples generating a liability on the death of the second partner is probably significantly higher. The result is that more like one in 14 families will ultimately face an inheritance tax bill.”

He warned of changes by the Chancellor Rachel Reeves, saying: “IHT is one of the few large taxes the government hasn’t explicitly promised not to change. That’s made it something of a political hot potato, and led to suggestions it could be a candidate for a hike.

“The reality though is that the government doesn’t need to change anything to increase its IHT harvest, it can just let frozen tax bands do their work.

“That will result in ever more families being dragged into the IHT net, and those that already pay see their tax bills rise. All without a spending a penny of political capital. Stealth taxes strike again.”

Sarah Coles, head of personal finance, Hargreaves Lansdown said: “Inheritance tax jumped in 2021/22 to a new record high, while 800 more estates were dragged into paying the tax. It owes a great deal to frozen tax thresholds - and this was just in the first year of the freeze.

"Even if the new government leaves the tax rules unchanged, it’s going to rake in more of this tax, and if it chooses to tinker, taxpayers could end up forking out even more.

"The scale of the money involved won’t dampen speculation that inheritance tax could be considered a soft target for a hike in the October Budget."