Financial PlanningTaxInheritance tax paid

Inheritance tax paid nearly doubles in ten years

Inheritance tax (IHT) is the tax that often wins pole position in surveys of the UK’s most disliked tax. One of the common criticisms of it is that it represents double taxation – you pay tax all your life and then IHT repeats the process at death.

IHT receipts-01
Source: HMRC; Inheritance Tax, Fig. 11

A long history of changes and no changes

IHT has its roots in Capital Transfer Tax (CTT), which was introduced nearly half a century ago to replace Estate Duty. Since CTT was reformed and rebranded as IHT in 1986 it has undergone many technical changes, most of which have been designed to raise more revenue. However, IHT has also been a curiously unchanging tax:

  • The annual exemption of £3,000 has been unchanged since 1981, the era of CTT.
  • The small gifts exemption has been stuck at £250 for one year longer.
  • The limits on marriage gifts have not been increased since the introduction of CTT in 1975.
  • The nil rate band has been frozen at £325,000 since 2009 and is not due to increase again until 6 April 2026.
  • The residence nil rate band, introduced in 2017, has been frozen at £175,000 since 2020 and it too is not due to rise again before 6 April 2026.

The freezing of the exemptions and nil rate bands means that IHT has steadily gained a larger audience of taxpayers and those caught are paying an increasing amount of tax. For example, average house prices have risen by over 75% since the nil rate band was frozen, according to Nationwide.

The graph shows the overall effect: between April 2012 and April 2022, prices increased by 25%, but IHT payments to the Exchequer came close to doubling.

And the future…

It was notable that during the recent campaign to become the new Prime Minister, neither of the final two candidates made any reference to IHT, despite the focus on taxation policy. That might be because, compared to income tax, IHT raises a small amount of revenue and effects many fewer people. It is also a highly efficient tax from the Treasury’s viewpoint: in 2021/22, the average IHT-paying estate suffered a tax charge of just over £250,000.

A recent review of IHT was undertaken by the Office of Tax Simplification (OTS). Its proposals, including a rationalisation of annual allowances and lifetime gifting, were almost entirely dismissed by the then Chancellor, Rishi Sunak. The OTS reports joined those of several think tanks that have suggested wider ranging reforms. The proposals in many of these would raise more tax by, for example, treating a gift or legacy as income of the recipient, subject to a single lifetime exemption of £125,000. It is conceivable that such a new form of IHT – more obviously an inheritance tax than the current version – could be introduced after the next general election.


IHT is a tax that rewards long term planning. History suggests it is also a tax that will continue to become increasingly relevant to families, if only because of successive Governments’ reluctance to update the value of exemptions and nil rate bands. 

If IHT is a concern to you, then the sooner you start planning, the better. If you already have an estate plan, make sure it is regularly reviewed to keep up with changes (and non-changes) in the law and your personal circumstances. Contact your AAM Wealth Manager or, contact us today for a free financial planning consultation and get all your financial affairs in order.


Important information

This article is intended for general circulation and for information purposes only. It may not be published, circulated, reproduced or distributed in whole or part to any other person without prior consent of AAM. This article should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any products mentioned herein. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed wealth manager regarding the suitability of the investment product before making a commitment to purchase the investment product. Whilst we have taken all reasonable care to ensure that the information contained in this article is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. Any opinion or estimate contained in this article is subject to change without notice. The above report may contain data obtained from third parties and as such we cannot guarantee the accuracy of this data. AAM Advisory Pte Ltd is licensed by the Monetary Authority of Singapore, FA Licence no 100032.