Inheritance tax receipts rise by £500m as Chancellor mulls cuts

More estates are paying inheritance tax but there are ways to reduce the bill without waiting for reforms

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Inheritance tax receipts (IHT) hit £4.6billion between April and October as frozen thresholds pushed more estates into paying the controversial charge.

Chancellor Jeremy Hunt is rumoured to be considering an IHT cut in the Autumn Statement this week but the latest HM Revenue and Customs figures show a £500m or 12% annual rise in receipts for the Treasury.

IHT allowances have been frozen at £325,000 until at least 2028, meaning more taxpayers will be pulled into paying IHT as wages and inflation increase, a process also known as fiscal drag. 

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Rising house prices are also pushing more estates into paying IHT.

“The Treasury will welcome the news that IHT receipts have shown yet another year-on-year increase,” says Laura Hayward, tax partner at Evelyn Partners.

“All eyes are now on whether IHT will get a mention in the chancellor’s Autumn Statement tomorrow. 

“While abolishing IHT completely would be a popular move with many, it seems more likely that the government will reserve this as an idea for a Conservative election manifesto pledge.”

The increasing revenue from inheritance tax has caused a conundrum for the government, says Rosie Hooper, chartered financial planner at Quilter, given how emotive the tax can be and its power to split voters.

“Though a steadily increasing number of families are paying inheritance tax since the chancellor extended the IHT threshold freeze until April 2028, it still impacts relatively few people and reports that he was considering a cut to the headline rate came under heavy fire as a result.”

HMRC data shows only 3.73% of estates actually paid IHT in the 2021/2022 tax year but receipts are at their highest levels and experts are predicting another record year.

You don’t have to wait for reforms to reduce your IHT bill though.

How to cut your IHT bill

Hooper says some call IHT a “voluntary tax” due to the number of exemptions available.

Assets can be passed to a spouse tax-free.

If you are leaving assets to other people, up to £175,000 of the family home can be be passed on tax-free to a direct descendant such as a child or grand-child using the main residence nil-rate band.

This is doubled to £350,000 when combined with the allowance of a surviving spouse or civil partner.

 On top of this, the surviving spouse would still have the £325,000 standard nil-rate band is available, meaning it is possible to pass on £1 million IHT-free as a couple.

 You can also make gifts each tax year of up to £3,000, so as a couple this could be a combined £6,000.

It is also possible to make gifts of unlimited value using potentially exempt transfers, which will be IHT-free after seven years if you haven’t passed away.

Other options include investing in companies that qualify for Business Relief, which is IHT-free after two years or you can put assets into a trust that is free of IHT.

“Seeking professional financial advice can help people manage their tax affairs and make the most of their money, particularly if changes come into play during tomorrow’s Autumn Statement that may complicate current plans,” adds Hooper.

 “The rules and restrictions surrounding certain aspects of tax planning can be difficult to navigate, particularly where inheritance tax is concerned, so speaking to a financial planner is key to ensuring you plan effectively and mitigate unnecessary costs.”

Marc Shoffman
Contributing editor

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.