UK’s largest estates pay an average of £9mn in inheritance tax

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The UK’s largest 40 taxpaying estates paid an average of £9.2mn in inheritance tax in 2021-22, according to figures released under the freedom of information act, seen by the Financial Times.

The data revealed that the top 40 estates had an average net asset value of £42.4mn, meaning that their average effective tax rate was around 22 per cent.

The headline rate of inheritance tax, or IHT, is 40 per cent, charged above a tax-free threshold of £325,000 — with an additional £175,000 allowance given if passing a main residence to direct descendants.

The wealthiest estates have often able to make use of inheritance tax reliefs that reduce the rate of liability. But changes made in the Budget, including for farming and business assets, mean it could be harder for people to mitigate against inheritance tax in future, some tax experts said.

The Budget changes would also lead to more middle-income families facing IHT bills, warned Derek Miles, chief executive of Titan Wealth Planning, an advisory firm, which made the FOI request.

“Changes to how inherited farms and pensions are taxed promise to increase IHT charges even further, unless you take the necessary steps to mitigate exposure,” he said.

The Autumn Budget made several reforms to inheritance tax including capping agricultural and business property relief at 50 per cent above a threshold of £1mn per person, from 2026. Meanwhile pension wealth, which was previously exempt from IHT, will form part of the deceased person’s estate from April 2027.

“Families will need to carefully consider how to structure these assets to optimise tax efficiency,” said Mike Bagg, tax partner at Milsted Langdon, an accountancy firm.

“For some, this may mean exploring different options, such as trusts or alternative succession plans, to retain family wealth across generations.”

The FOI reported that in 2021-22, 889 families were hit with charges of more than £1mn, including 67 estates where IHT exposure was greater than £4mn.

Early planning was key to limiting the potential impact of an IHT liability on beneficiaries, Miles said. This included the option of giving assets away during your lifetime. Under the “potentially exempt transfer” rules, individuals can make gifts of unlimited value free of inheritance tax if the person survives a further seven years.

“There are ways to mitigate and not to pay inheritance tax, but time is your enemy,” Miles said.

“It’s also crucial to understand the rules before you embark on this course of action. For example, if you gift a property to your children, you can’t live there rent-free afterwards. If you do, then the IHT exemption will no longer apply.

“This is something particularly relevant to farmers looking to make use of lifetime gifting, given that many will actually live on their farms.”

The removal of the IHT exemption on pensions from 2027 would be a key driver in increasing the number of estates facing an inheritance tax bill, the advisers said.

Bagg said some pensioners might want to consider drawing on their pensions earlier than they would have, because of the changes. However, he recommended proceeding with caution “to ensure you don’t run out of funds to cover your basic needs before you pass away”.

“Additionally, be mindful of the tax implications of drawing down larger amounts, as this could push you into a higher income tax bracket,” Bagg said.