Nearly 10% of estates have inheritance tax bills that exceed £500,000

The problem appears to be getting worse Thousands of estates have already had to pay a six-figure inheritance tax bill

During the 2021 - 2022 tax year, nearly one out of ten estates that were subject to inheritance tax received a bill of at least £500,000.

Over 2,520 estates (9 percent) had a tax bill of at least 500,000 out of the 27,850 estates that paid inheritance tax in 2021 - 2022. Out of these 2,520, 890 estates owed over £1 million in taxes.

Wealth and asset management company Rathbones submitted a Freedom of Information request to HMRC, obtaining the data, which reveals that the total number of estates obligated to pay over 500,000 in inheritance tax has increased by 29% since the 201819 tax year.

According to Rathbones, if this trend keeps up, 3,524 estates will have to pay over £500,000 in inheritance by the end of the current 2025 - 2026 tax year. This is based on an average increase.

According to a report released earlier this year by HMRC, inheritance tax revenues increased by 10% during the 2024 - 2025 tax year, reaching an all-time high of 8.2 billion.

Inheritance tax payments made by estates between 2018 and 2022 are displayed in the table below.

HMRC.

"Despite the availability of gifting allowances and the seven-year rule, IHT charges are expected to catch more and more people," stated Rebecca Williams, divisional lead of financial planning at Rathbones.

Additionally, she stated: "A creeping kind of fiscal drag has resulted from the deep freeze on both the main nil-rate band and the residence nil-rate band, which have remained unchanged since 2009 and 2017, respectively.

Williams claimed that because inheritance tax thresholds have not kept up with inflation, more estates are being taken above it due to the steady increase in home and asset values.

The number of people who will have to pay a tax bill of half a million pounds or more could rise significantly in the upcoming years, even though inflation and frozen tax brackets will likely continue to drive up the number of high inheritance tax bills.

Pensions will be counted toward the value of your estate upon your death starting in April 2027, which should result in a sharp rise in estate values.

Rathbones anticipates that by 2030, thousands more estates will have to pay more in inheritance taxes.

Williams claimed that it is "increasingly vital for families to engage in effective financial planning" because of the increased inheritance tax risk associated with pensions.

She cautioned, "If proactive measures are not taken, more estates will find themselves facing IHT bills they might not have anticipated."

Your inheritance tax bill can be reduced.

If your estate is worth less than the UK's nil-rate band, which is the threshold below which inheritance tax is not applied, you can pass it down tax-free. This threshold is 325,000.

Additionally, if you leave your home to your direct descendants, the residential nil-rate band adds an additional 175,000 to the nil rate band. This means that you could leave a home worth up to 500,000 without having to pay inheritance tax.

In the event that you and your spouse leave each other your estates, this can be raised to £1 million.

Given the growing likelihood that families will be required to pay a sizable inheritance tax on estates, it might be worthwhile to learn how to reduce your tax liability or stay clear of inheritance tax entirely. Making the most of your gift allowances may fall under this category.

Up to 3,000 of your assets, for example, can be given away as gifts each year without incurring inheritance tax; if you didn't use the allowance the year before, this amount can rise to 6,000.

You can also give more than this, but the person who receives it will have to pay inheritance tax if you pass away within seven years of giving it. Depending on when you gave the gift, the rate taper off.

Eight strategies to lower your inheritance tax bill are listed in a BFIA guide.