How inheritance tax and capital gains tax bills have soared

Official figures from HM Revenue & Customs reveal huge increase in inheritance tax (IHT) and capital gains tax (CGT) burden.

Tax year ending April	Inheritance Tax (IHT)	Capital Gains Tax (CGT)	Income tax	NI Contributions	VAT	Child benefit payments
2013	£3.1bn	£3.9bn	£152bn	£102bn	£101bn	£12.2bn
2018	£5.2bn	£7.8bn	£180bn	£131bn	£126bn	£11.7bn
2019	£5.4bn	£9.2bn	£191bn	£137bn	£133bn	£11.5bn
2020	£5.1bn	£9.8bn	£193bn	£143bn	£130bn	£11.5bn
2021	£5.3bn	£11.1bn	£194bn	£143bn	£102bn	£11.5bn
2022	£6.1bn	£15.3bn	£221bn	£158bn	£158bn	£11.4bn
2023	£7.1bn	£18.1bn	£247bn	£176bn	£160bn	£11.6bn
Increase in tax take since 2020	38%	84%	28%	23%	23%	1%
Increase in tax take over the past 10 years	128%	360%	62%	72%	59%	-5%

Commenting on the increase in IHT paid by households, Alice Guy, Head of Pensions and Savings at interactive investor says: “Soaring inheritance tax takings highlight the cold efficiency of fiscal drag as frozen tax thresholds drag more and more households into the tax net. Rising property prices since 2009 mean pensioners with modest incomes who’ve never felt rich could be left with a huge tax bill when they pass on wealth. The average home in London is now worth £525,000 and could attract an inheritance tax bill of £80,000, depending on other reliefs.

“The £325,000 nil rate band has been stuck at the same level since 2009, dragging more and more households into the inheritance tax net.

“The residence nil rate band of £175,000 means that some taxpayers get to pass on £500,000 tax-free (£325,000 plus £175,000). But the uneven rules mean the residence nil rate band only applies to people passing on a home to their children or grandchildren, while taxpayers who rent or don’t have children could have a bigger tax bill.”

Key inheritance tax (IHT) tips:

If you can afford to give away lifetime gifts, this can be a great way to reduce your inheritance tax bill. You can give away up to £3,000 each tax year and put that money immediately outside your estate for IHT purposes.
However be careful, as giving away assets could trigger a capital gains tax (CGT) bill.
Giving away larger amounts could save on inheritance tax, but you’ll have to survive for seven years for those assets not to be taken into account for inheritance tax.
If you own a range of assets, then it could also make sense to plan the order you use up your assets. Pension wealth, for example, won’t be counted for inheritance tax. Take advice to make sure you’re on track to minimise your tax bill.
Make sure you have an up-to-date will, as how you leave your assets could affect your tax bill.

	Basic-rate taxpayer		Higher rate taxpayer
Capital gain	CGT due after 6 April 2023	CGT due after 6 April 2024	CGT due after 6 April 2023	CGT due after 6 April 2024
£10,000	£400	£700	£800	£1,400
£20,000	£1,400	£1,700	£2,800	£3,400
£50,000	£4,400	£4,700	£8,800	£9,400

Source interactive investor. Changes reflect that capital gains tax annual exemption is more than halving, going from £12,300 to £6,000 in April 2023 and £3,000 from April 2024.

Alice Guy says: “The rising capital gains tax bill is just a mild foreshadowing of things to come. The capital gains tax bill was increasing even before the annual allowance was cut in April 2023, so there’s more pain to come for investors and buy-to-let landlords.

“The total amount collected in capital gains tax has doubled in the last five years and increased fourfold in the last 10 years. And there’s more to come, as the annual capital gains tax allowance has been cut from £12,300 to £6,000 this tax year and £3,000 next tax year, meaning that a modest £10,000 capital gain on shares with no tax bill in 2022-23 will cost £800 CGT this year, compared to £0 last year.

“For investors, it’s important to protect your wealth inside a tax wrapper such as an ISA or SIPP. Investments held inside an ISA or pension won’t attract capital gains tax or dividend tax, which can slice into your investment wealth over time and seriously dampen your returns.”

Fiscal drag and income tax

Myron Jobson, Senior Personal Finance Analyst at interactive investor adds: “The latest set of HMRC tax receipts shows that this secret tax strategy is paying off in a big way for the government, with the government’s tax takings remaining on an upward trajectory.

“It is no secret that public finances aren’t in the best of shape following the government’s colossal spend on Covid and latterly cost-of-living support measures. Instead of changing income tax rates, the government has chosen not to raise the personal allowance in line with earnings or inflation. This means we’ll all pay more in tax - but in a less obvious way. It creates a situation where workers pay more taxes and have less purchasing power, even when earning more.

“This so-called fiscal drag hits us all – even if we don’t change tax band. That’s because as our pay rises with inflation, more and more of our pay packet is taxed and our overall tax burden increases. Our calculations show that someone earning £30,000 is set to pay £398 more tax in this financial year because of fiscal drag.

“Personal Allowance and income tax thresholds are frozen until 2028 at present – meaning as our earnings grow, the longer the freezes remain in place, the more the effect is magnified.”

interactive investor (ii) is part of abrdn. ii is the UK’s leading flat fee investing platform for individual investors.

The information in this article should not be regarded as financial advice. Information is based on interactive investor’s understanding in July 2023. Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment. The value of investments can go down as well as up, and you may get back less than you paid in.