Inheritance tax receipts set for record breaking year after £400m rise

Inheritance tax receipts could be set to surpass £7 billion - how to reduce your bill

Money falling from one hand to another
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Inheritance tax (IHT) receipts are set to hit a record high this tax year after increasing to £5.2 billion between April and November 2023.

Figures from HM Revenue and Customs (HMRC) show an extra £400 million of IHT was paid to the taxman during the eight-month period.

It comes as the IHT threshold remains frozen, meaning more estates face paying the controversial tax charge due to high house prices and rising values of other assets.

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Analysts expect the total IHT receipts for the 2023/2024 tax year to beat last year’s high of £7.1 billion.

Rumoured IHT reforms didn’t materialise in the Autumn Statement but there are hopes that changes could come in next year’s Budget especially with a general election looming.

“It had been widely rumoured that the government was looking to make changes to its IHT rules, but at least for now more families will be topping up government coffers as they are caught by the IHT net,” says Shaun Moore, tax and financial planning expert at Quilter. 

“IHT is a highly emotive tax that can split voters, so we can expect it to continue being a battleground policy for both the Conservatives and Labour as we near the general election. 

“Though Jeremy Hunt opted not to make changes during his latest statement, we are expecting a budget to take place in March during which it could resurface if the Tories view it as a vote winner. Either way, some form of simplification of the tax is overdue.”

Julia Peake, tax and estate planning specialist at Canada Life, says IHT is not just a tax on the wealthy and is on course to deliver £9 billion for the Treasury by 2027/2028.

This is because frozen thresholds on IHT allowances such as the £325,000 nil-rate band and the £175,000 main residence allowance, are creating fiscal drag, meaning more estates face paying the tax as the value of their assets rise even if the rate is the same.

“People think that they won’t be caught but with both the standard and residential nil rate bands remaining frozen until at least April 2028, and compounded by house price inflation, more people are finding that when their house becomes unencumbered by a mortgage it takes up most if not all of their nil rate bands,” says Peake.

“This results in other assets in their estate being hit by IHT. This will remain the case unless rumours of change materialise next year in the spring Budget, with the unfreezing of thresholds.”

How to reduce your IHT bill

Currently, just 4% of estates pay inheritance tax.

That may not seem like many but the Institute for Fiscal Studies is warning that  this will grow to more than 7% by the next decade or one in eight estates due to frozen thresholds.

Calculations by Wealth Club suggest the average bill could increase to £233,000 this tax year from  £214,000 just three years ago.

There are ways to reduce your estate’s IHT bill though so you can leave more money to your loved ones.

Leaving money to your spouse or civil partner is automatically tax-free, so make sure this is reflected in your will.

You can also give 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.

Investors can also back companies that qualify for business relief, which is typically inheritance tax free after two years. 

“The good news is that there are still lots of legitimate ways to pass on money free of inheritance tax, which is why inheritance tax is referred to as a ‘voluntary tax’ in some circles,” says Nicholas Hyett, investment manager at Wealth Club.

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.