Does Inflation Affect Inheritance Tax?

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The latest government figures showing the amount of inheritance tax paid in the UK were released in July giving us reason to review how house prices and inflation affect inheritance tax.

Are more people paying inheritance tax?

The amount of inheritance tax paid during the financial year 2021 to 2022 was £6.1 billion.  This represents an increase of £729 million on the previous financial year.

In the tax year 2019 to 2020, there was also a slight increase in the number of estates paying inheritance tax.  From deaths in the UK, 3.76% resulted in inheritance tax becoming payable.  This is the first time there has been an increase since the tax year 2016 to 2017.  The actual number of deaths giving rise to an inheritance tax charge was 23,000 in the tax year 2019 to 2020.

How does inflation affect inheritance tax and are there other factors?

These increases are probably not that surprising, given that the Inheritance Tax Nil-Rate Band allowance has remained at £325,000 since 2009.  The introduction of the Residence Nil-Rate Band, which is now at its maximum level of £175,000, had helped to reduce the tax receipts, but now that it too has been kept at the same level for the past few years, the impact of rising inflation and house prices is one reason why the inheritance tax payable is increasing.

Are inheritance tax exemptions affected?

The value of transfers to charities which were exempt from inheritance tax because of their charitable exemption fell from £1.7 billion to £1.6 billion in the financial year 2019 to 2020.  This is the lowest amount exempted from tax in the past ten years, but it is still the third largest exemption set against estates.

The largest exemption for inheritance tax continues to be in relation to transfers between spouses and registered civil partners.  This relief was valued at £13 billion and applies to approximately 40% of estates above the Nil-Rate Band allowance of £325,000.

The second largest relief relates to Agricultural and Business Property Relief, although in the tax year 2019 to 2020 the amount exempted fell in comparison to the previous year by 20%.

Whilst the report goes on to provide further information, some of which might be described as interesting, what is clear is the impact that inheritance tax continues to have on estates.

Inheritance tax in the south east

Perhaps unsurprisingly, it was London and the south east of England that have the highest number of estates giving rise to an inheritance tax charge, which equates to 55% of the inheritance tax liability for England, or 47% of the  liability across the whole UK.

What is clear from these figures is that appropriate planning to mitigate inheritance tax continues to be important, making use of available allowances and exemptions, for those that find themselves potentially liable to the tax.  Now is a good time to look at your own circumstances and consider what can be done to help mitigate any potential liability.

Here to Help

For advice about inheritance tax planning, please contact Richard Horwood, Partner and Head of our Private Client team.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.