The 6-Billion Inheritance Tax Tidal Wave That Has Smashed UK Records

The issue of inheritance tax remains significant, and its future remains a topic of intense debate among the UK public.

 Rising like a tidal wave, Britons found themselves swimming in an astonishing £5.76 billion of inheritance tax debt during the 2020-21 fiscal year. 

This record-breaking figure was driven by a significant surge in the number of estates subject to the levy, fuelled in part by the tragic impact of the Covid-19 pandemic on mortality rates.

According to HM Revenue & Customs, the inheritance tax liabilities shot up by a staggering £800 million compared to the previous year, leaving many families grappling with the financial consequences of the levy. The total number of charges also witnessed a steep ascent, climbing 17% to reach 27,000 in the same period

Which items are liable for inheritance tax?

The sky-high figure has not only come about by the high number of COVID-related deaths: the UK also includes a broad range of taxable items on the inheritance tax list. A quick summary of these might include the following:

  • Cash and bank accounts: The value of money held in cash, savings accounts, and other financial institutions is included in the estate. The source of the funds, providing it’s legal, doesn’t matter, so that means that anything from winnings from online betting games to a cash donation from a wealthy benefactor is included.
  • Property: This includes the deceased’s primary residence, second homes, and any other real estate owned at the time of death.
  • Investments: Stocks, shares, bonds, and other investment holdings are part of the estate and subject to inheritance tax.
  • Vehicles: Cars, motorcycles, boats, and other vehicles are included in the estate.
  • Personal possessions: Valuables such as jewelry, artwork, antiques, and collectibles are part of the estate’s value.
  • Life insurance policies: If the deceased had life insurance policies that pay out to their estate, the value is subject to inheritance tax.
  • Business assets: If the deceased owned a business, the value of the business assets may be included in the estate.
  • Gifts within seven years of death: Gifts made by the deceased within seven years of their death may be subject to tax.

The possible abolition of inheritance tax

While the highest number of COVID-related deaths in Europe played a big part in the UK’s astronomical bill, inflation, and frozen tax thresholds contributed to the surge in liabilities.

Lucy Woodward, a partner at accountancy firm Saffery Champness, pointed out that the tax-free threshold has been frozen since 2009, failing to keep pace with rising asset values and inflationary surges.

This phenomenon, known as “fiscal drag,” is expected to affect more estates in the coming years if thresholds and allowances remain unchanged.

Some Conservative MPs have called for the abolition of inheritance tax, aiming to gain support from the electorate ahead of an expected general election next year. However, the record revenue generated from the levy may prompt a reconsideration of this proposal. Removing this income would create budgetary challenges for the government, worsening the UK’s already bleak economic outlook.

The counterargument is that abolition would boost wealth creation and the economy, but experts warn that it might lead to the introduction of a wealth tax instead, which could be even less popular.

As the debate continues, policymakers will need to carefully weigh the economic implications and potential alternatives to get to the best decision for the country.

Inheritance tax in future years

The 2021 tax bill is a tough pill for Brits to swallow, but it might be about to get worse. MRC forecast that IHT will raise £7.2 billion in 2024, equivalent to 0.7% of all receipts and 0.3% of national income.

While much of this will be paid on time, potentially leading to a lower debt than that from 2021, it still represents a huge burden for the nation’s inheritors to carry.

Should it stay at similar levels, or get much bigger, then the calls for its abolition will also grow. If the scrapping of the tax comes to pass, then the UK will join the list of countries that don’t impose inheritance tax, including Australia, New Zealand, and Canada.

Either way, the issue of inheritance tax remains significant, and its future remains a topic of intense debate among the UK public.