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

The UK’s top 40 taxpaying estates paid an average inheritance tax (IHT) of £9.2 million in 2021-22, with an average effective tax rate of 22%, according to data obtained under the Freedom of Information Act. Despite the headline IHT rate of 40% on assets above the £325,000 tax-free threshold (plus a £175,000 allowance for passing a main residence to direct descendants), wealthy estates have historically utilized reliefs to reduce their liability. However, recent reforms in the Autumn Budget, including changes to agricultural and business property relief and the removal of IHT exemptions on pensions starting in 2027, could make it harder for families to avoid significant IHT bills.

Experts warn that the Budget changes will impact not only the wealthiest but also middle-income families, potentially increasing the number of estates facing IHT liabilities. Key reforms include capping agricultural and business property relief at 50% for assets above £1 million per person from 2026 and including pension wealth in the taxable estate from 2027. Tax advisors emphasize the importance of strategic planning, such as using trusts or lifetime gifting, to mitigate IHT exposure. Under “potentially exempt transfer” rules, individuals can gift assets tax-free if they survive seven years post-gift, though proper understanding of rules, such as the prohibition on living rent-free in gifted properties, is critical.

The removal of pension IHT exemptions is expected to drive up the number of taxable estates, with some advisors suggesting pensioners consider early withdrawals to avoid heavier taxes. However, such moves require caution to ensure sufficient funds for basic needs and to avoid higher income tax brackets. Overall, early and informed planning is vital to minimize IHT burdens and preserve family wealth for future generations.

For more information see Emma Agyemang “UK’s largest estates pay an average of £9mn in inheritance tax” The Financial Times, December 5, 2024. 

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.