Put simply, it is a tax paid on someone’s assets (property, possessions and money) after they die, but only if they leave enough to go above a certain threshold.
The standard IHT rate is 40%, and it is only charged on the part of the estate that is above the tax-free threshold, which is now £325,000.
However, the rules are complex: there are various tax-free allowances and reliefs, plus exemptions for things such as agricultural land, businesses, shares in companies listed on the Aim stock market and pensions.
These will often minimise the IHT bill or mean there is nothing to pay.
Who pays it?
In the 2021-22 tax year, 27,800 deaths resulted in an IHT bill, which was 4.39% of all UK deaths that year. The tax raised £5.99bn that year.
However, the main IHT threshold has been frozen at £325,000 since 2009 and is due to stay at that level until at least April 2028, so rising house prices and the increasing value of people’s investments and other assets are gradually pulling more people into the IHT net – a phenomenon known as fiscal drag. In 2023-24, the government raked in a record £7.5bn from the tax.
The average amount of IHT paid by all taxpaying estates in 2021-22 was £215,000, but that was pulled up a lot by the bills imposed on the very wealthiest estates.
And despite the headline rate being 40%, the various allowances and other ways of bringing down the liability mean the average rate paid by those affected in 2021-22 was actually a third of that: 13%.
This may help explain why some of those backing a shake-up believe there are billions that can be raised by making changes to the system.
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