Inheritance tax (IHT) raised £749 million last month, taking the total 2024/25 tax year haul so far to £2.8 billion.
This marks an increase of £230 million - or 9% - compared to the same four months last year.
As chancellor Rachel Reeves prepares for her autumn Budget, speculation is mounting that she could change the inheritance tax rules to raise even more revenue.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The money generated from IHT has been steadily rising in recent years. The latest official figures for a full tax year reveal that £5.99bn was paid in inheritance tax in 2021/22, an increase of £230 million on the previous year.
In April to June this year, HMRC collected £2.1 billion in IHT, £83 million higher than the same period a year ago, and an increase of more than 4%.
“The tax take continues to soar, and the sums involved would turn the head of any chancellor assembling their first Budget,” comments Sarah Coles, head of personal finance at Hargreaves Lansdown.
“Speculation has been rife that Rachel Reeves is considering inheritance tax and capital gains tax as potential money-raising targets in her October Budget, and billions of pounds pouring in through the doors of the Treasury are unlikely to persuade her there’s not more potential tax to reap.”
According to HMRC, the combined receipts for income tax, capital gains tax and National Insurance receipts for April to July 2024 were £156.4 billion, a £1.5 billion uplift compared to the same period last year.
Why are inheritance tax receipts rising?
Frozen tax-free allowances and rising house prices are largely to blame for the increase in inheritance tax paid by bereaved families.
The tax-free allowance (known as the nil-rate band) is £325,000, with an additional £175,000 available to those leaving the family home to their children or grandchildren.
The £325,000 allowance has been at this level since 2009, while the £175,000 residential nil-rate band was phased in between 2017 and 2020. It has been held there ever since.
The nil-rate bands were frozen at these levels by the Conservative government until 2028.
According to Stephen Lowe, group communications director at retirement specialist Just Group, the combination of frozen thresholds and property price rises are driving a record inheritance tax take, “with receipts doubling compared to 2009 when the tax-free threshold was frozen”.
Laura Hayward, tax partner at the wealth manager Evelyn Partners, notes that inheritance tax receipts are likely to continue to rise, especially with the baby boomer generation’s “accumulated wealth being passed on to children and grandchildren, and getting taxed on the way”.
She adds: “The Office for Budget Responsibility forecasts that the share of deaths resulting in the payment of inheritance tax will rise to 6.3% by 2028/29, the highest level since the 1970s. That proportion was as low as 2.7% in 2009/10.”
Will the chancellor change the inheritance tax rules in her Budget?
Reeves will deliver the Labour government’s first Budget on 30 October. While the government has ruled out raising income tax, National Insurance, VAT and corporation tax, the chancellor has warned of “difficult decisions” ahead to plug the black hole in the public finances.
Last month, Reeves scrapped the Winter Fuel Payment for millions of pensioners.
Experts predict that there will be more bad news to come in the Budget, with IHT likely to be in the chancellor’s sights.
Lowe comments: “It seems inevitable that the chancellor will at the very least run her slide rule over inheritance tax to see if it’s a way to raise more revenue.”
Rather than reduce the nil-rate band or increase the rate of IHT (currently 40%), there could be changes around what is liable for IHT, and scrapping reliefs.
“Senior Labour figures have made it clear they think certain reliefs - specifically business and agriculture property relief - are too generous and think-tanks seem keen that defined benefit pension pots are brought into the remit of IHT,” comments Hayward.
There are rumours that capital gains tax (CGT) will also be reformed in the Budget, to increase the tax take. One option could be to charge CGT on top of IHT, resulting in a “double death tax”.
How to cut your inheritance tax bill
There are steps families can take to pass their estate to loved ones in a more tax-efficient way.
Gift allowances allow you to give away a total of £3,000 each year without it counting towards your estate. Gifts that exceed this value are known as “potentially exempt transfers”. If you die within seven years of making the gift, IHT is due on a sliding scale between 8% and 40%, depending on the date of death.
Pensions can also be used to pass on wealth tax-efficiently. Under current rules, you can pass your pension to a beneficiary and no IHT is due. If you die before you turn 75, your beneficiary won’t have to pay any income tax either when they withdraw the cash.
We have lots more ideas about how to cut inheritance tax in Eight ways to reduce your IHT bill.
Average earnings by region – how does your income compare?
St James’s Place confirms new fees – what it means for customers
