Inheritance tax receipts hit a record year as it hits £3.2bn

HM Revenue and Customs is on course to collect a record-breaking £8bn in inheritance tax (IHT) revenue this year due to fiscal drag.  

 HMRC raked in £3.2bn in IHT in the three months between April and August 2023, some £300m more than in the same period a year earlier.

IHT revenue has been increasing month after month as personal allowance thresholds are frozen until at least 2028. In many cases, higher property prices and inflation are pushing more households into the IHT net.

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The average UK home has more than tripled in value over the past two decades from £84,620 in 2000 to £290,000 today, fast approaching the frozen IHT nil-rate band of £325,000. 

INHERITANCE TAX BANDS FROZEN 

The Treasury has collected £133m per week in inheritance this tax year so far, up by 10% compared to the same period last year. “Despite the slowdown in the housing market over recent months, many people will be caught by the IHT trap,” says Julia Peake, tax and estate planning specialist at Canada Life.

HMRC’s annual bulletin shows that in the financial year 2020/21, some 27,000 estates paid IHT, a 17% increase compared to the previous year.

“Rising IHT receipts are continuing to prove extremely lucrative for the Treasury and this doesn’t look set to change anytime soon,” says Laura Hayward, tax partner at Evelyn Partners.

HMRC says that receipts in June 2023 were the highest monthly total on record. This record-high month was attributed to possible effects from the recent rise in interest rates.

Experts say that 2023 is well on track to being a record-breaking year in IHT receipts for the Treasury.

“IHT receipts from April to August 2023 reached £3.2bn, £0.3bn higher than the same period last year. The total inheritance tax take for the 2022-23 tax year was £7.1bn, meaning this year’s take is well on course to break new records and could come close to £8bn,” Rachael Griffin, tax and financial planning expert at Quilter, says.

HOW CAN YOU MINIMISE YOUR INHERITANCE TAX BILL? 

Inheritance tax is charged at 40% on estates over £325,000. Individuals have an extra £175,000 allowance towards their main residence if it is passed to their children or grandchildren, and spouses can share their allowances. This can take the allowance up to £1m for a married couple.

Although the house will usually be the biggest factor when it comes to IHT, the value of the estate includes everything: property, cars, savings, investments and other assets, including personal items.

One of the best advice experts give when it comes to IHT is not to fall for the trap of believing that you will never get caught in this fiscal drag.

“Don’t be caught out by thinking that this won’t affect you. It’s not just the value of your home that you need to consider, it’s your whole “net estate” after liabilities  have been considered and reliefs have been applied, which adds up over a lifetime. Remember, if you miss the six month deadline to pay IHT, HMRC will start charging interest on top as well,” Peake warns.

Making gifts to family members can be one of the best places to start in reducing or eliminating an IHT bill, Hayward says. Gifts you make are generally not subject to IHT unless you die within seven years. 

Setting up trusts can be a helpful means of passing on assets to the next generation. Trusts can only be accessed at a certain time or for a particular reason.

You can read more about how to reduce your IHT bill.