Inheritance Tax between 2015/22
Background
In 2015, the Inheritance Tax landscape in the UK was relatively stable, with the nil-rate band set at £325,000, a threshold that had been in place since 2009.
In 2017, the Residence Nil-Rate Band (RNRB) was introduced, allowing an additional threshold for passing on the family home to direct descendants. This band started at £100,000 and increased annually to reach £175,000 by April 2020.
Another change in 2017 was the inclusion of UK residential property owned indirectly by non-UK domiciled individuals within the scope of IHT.
By 2019, the number of IHT liable estates and the total tax liability reflected steady economic conditions. However, the onset of the COVID-19 pandemic in 2020 brought significant changes. The pandemic led to increased mortality rates, which in turn affected the number of estates subject to IHT.
Additionally, the economic uncertainty caused by the pandemic impacted asset values, including house prices. Despite the initial dip in the housing market, house prices began to rise sharply by 2022, driven by factors such as the stamp duty holiday and changing housing preferences. This increase in house prices contributed to higher estate values, pushing more estates not just above the £325,000 threshold, but also the maximum £1 million nil-rate band that can be enjoyed by married couples.
These factors are visible in the latest government statistics for Inheritance Tax. In 2019/20, 24,200 estates were liable for IHT and the estimated tax liability stood £5.3 billion. By 2021/2022, these figures had increased with 27,800 estates being liable for a combined estimated tax bill of £5.9 billion.
Current regional reporting and the need for a FoI
HMRC publishes IHT data annually in July with the latest relating to the 2021/22 tax year. Local statistics are released simultaneously and are grouped very broadly by UK region and narrowly by parliamentary constituency. Although IHT location data is collected using postcodes, it is not published in that format. Our request to access this data was based on the limitations of these two datasets.
Key findings
Initial analysis of the data which covers 2015-22 reveals the number of IHT-paying estates increased within nine out of 10 UK postcodes. It is also clear that the rate of increase is different according to the region.
The number of estates liable for Inheritance Tax in Yorkshire & Humber, together with the North West, for example, increased by almost 40% whilst others were less than 20%.
Greater London performed differently to other areas of the UK as its number of estates liable for IHT increased by less than 5%. Despite this fall, the amount of tax paid increased by more than 40%. Yorkshire on the other hand had one of the largest increases in the number of estates, but this wasn’t reflected in growth in the tax take within the region.
The introduction of the RNRB is likely to have been the driver for reducing the number of estates liable for IHT in London, as more benefitted from this additional threshold. However, the 2017 changes also included bringing UK residential property owned indirectly by non-UK domiciled individuals within the scope of IHT.
London, being a global city with a significant number of non-UK domiciled individuals owning high-value properties, saw an increase in the IHT liability for these estates. In other words, the number of estates liable for IHT, reduced, but the total tax paid by many of the estates that were captured by IHT went up.
London number of estates liable for IHT increased by less than
The top 20 locations with the biggest percentage increase in the number of tax-paying estates from 2015/16 to 2021/22 highlight significant growth across some towns and cities.
During the period, Wolverhampton led with a 75% increase, followed closely by Bradford and Dundee. Other notable cities include Sheffield, Manchester, and Swansea, all showing substantial growth.
An analysis of the major UK cities during the period, reveals that the growth in IHT liability generally outpaced the growth in the number of tax-paying estates.
This phenomenon can be attributed to several factors, including significant increases in estate values due to rising property prices, stock market gains, and asset appreciation. Additionally, changes in tax legislation, such as the freezing of IHT thresholds, have contributed to higher tax liabilities even if the number of estates did not grow as much. Economic growth, inflation, and increased wealth accumulation also played a role in this trend.
Inner London, however, presents a different case where the growth in tax liability did not outstrip the growth in the number of tax-paying estates. This can be explained by the already high initial estate values in London, which may not have increased as dramatically as in other regions. Market saturation and wider use of sophisticated estate planning by London residents, including the use of trusts and tax reliefs, have mitigated the rise in IHT liabilities. Additionally, demographic changes and the varied impacts of the COVID-19 pandemic on London's economy have also resulted in a less pronounced increase in tax liability compared to other regions.