UK government receives record £5.76bn in inheritance tax

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Britons owed a record £5.76bn in inheritance tax in 2020-21, driven by a sharp increase in the number of estates paying the levy as the death rate climbed during the Covid-19 pandemic.

Figures released by HM Revenue & Customs on Wednesday showed that inheritance tax liabilities were up by £800mn in the 2020-21 tax year, compared to 2019-20.

The total number of charges also increased by 17 per cent to 27,000 in 2020-21, up by 4,000 on the previous year. The number of deaths was 722,000, up from 612,000 in 2019-20, which HMRC attributed to the effects of the pandemic.

Tax experts acknowledged the impact of the pandemic on higher mortality rates but argued that inflation and frozen tax thresholds were also an important driver of the jump in liabilities.

“IHT liabilities are at a record high — created by a perfect storm of factors not least including the fact that the tax-free threshold has remained frozen at 2009 levels and has failed to keep pace with rising asset values, to say nothing of recent inflationary surges,” said Lucy Woodward, partner at Saffery Champness, an accountancy firm.

“Fiscal drag is a reality that will really start to bite in the coming years when an even greater proportion of estates will inevitably become liable for IHT if the thresholds and allowances stay as they are.”

Some Conservative MPs have called for the abolition of inheritance tax in an attempt to shore up support from the electorate ahead of a general election expected next year.

“Given the steadily rising tide of IHT receipts taken by the Treasury, driven in large part by frozen nil-rate band thresholds and rising asset prices, it’s perhaps not surprising that this already unpopular tax is now widely regarded as another ‘stealth tax’,” said Ian Dyall, head of estate planning at wealth management firm Evelyn Partners.

Some experts believe that the record take from the levy may give those arguing for the abolition of inheritance tax pause for thought.

“There is a chance that abolishing IHT could help turbocharge wealth creation, and therefore the economy, but abolition could also usher in a new even more hated tax — a wealth tax,” said Rachael Griffin, tax and financial planning expert at wealth manager Quilter.

But she cautioned: “Considering how lucrative the tax is, getting rid of it altogether could punch a hole in the country’s budget, compounding an already bleak economic outlook, and the government will need to fill that hole.”