The government continues to rake in record sums from death duties, according to the latest inheritance tax receipts from HMRC.
Inheritance tax (IHT) is often voted Britain’s most-hated tax, despite only being paid by around 4% of estates, but more families are likely to be dragged into its net over the next few years.
IHT receipts for April to September – the first six months of the tax year – totalled £4.3 billion. This is £400 million (or 10%) higher than the same period a year ago.
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It continues an ongoing trend. IHT receipts hit an all-time high of £7.5bn in the 2023/24 tax year. The latest figures suggest we are on track for another record year in 2024/25.
Rising IHT receipts in recent years have largely been a result of fiscal drag, as rising asset prices and frozen nil-rate bands drag more estates inside the IHT net.
But the government could be set to rake in even more money from death duties going forward amid rumours it is planning to cut IHT exemptions in the upcoming Budget.
Laura Hayward, tax partner at wealth management firm Evelyn Partners, says: “Any changes aimed at increasing the IHT take beyond this fiscal drag effect are likely to reap outsize results over the coming years as the baby boomer generation reaches average mortality.”
Will inheritance tax go up in the Budget?
Although the rate of inheritance tax isn’t expected to rise in the Autumn Budget (it is already high at 40%), rumours suggest the chancellor could be looking at tightening up IHT exemptions.
For example, sources briefed on Rachel Reeves’s Budget preparations told the Financial Times she has looked at extending the seven-year rule on gifting to 10 years. But there are a range of other areas she could consider too.
There is also an expectation that Reeves could target business and agricultural property relief and AIM shares. Pension pots could also be in focus, as they are generally excluded from the inheritance tax net under current rules.
Furthermore, the government could look at applying capital gains tax to inherited assets at the point they are passed down to a loved one. This could effectively result in a ‘double death tax’.
“Whether or not changes are introduced, it’s vital that people understand where their estate stands in relation to the current IHT threshold,” says Stephen Lowe, group communications director at retirement specialist Just Group.
"Regularly reviewing the value of an estate, particularly with property valuation in mind, can help individuals to understand their position relative to the tax threshold, enabling them to plan more effectively,” he adds.
How much inheritance tax will you pay?
Under current rules, you can pass on an estate worth up to £325,000 before an inheritance tax bill is due, with an additional £175,000 allowance for those leaving the family home to their children or grandchildren. These allowances are known as the regular and residential nil-rate bands.
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. House prices have risen considerably in this period, meaning families are now able to pass on less wealth before being hit by a hefty tax bill.
The average UK house price was around £230,000 when the residential nil-rate band was first introduced, according to data from the Office for National Statistics (ONS). Today it is £293,000. Meanwhile in London, the average house now costs £531,000.
The good news is that married couples and civil partners can combine their nil-rate bands to pass on more of their estate tax-free. This means those leaving the family home to direct descendants could potentially pass on an estate worth up to £1 million before an IHT bill is due (£325,000 + £175,000 + £325,000 + £175,000).
Gift giving: should you act before the Budget?
Amid concerns that gifting rules could be made more restrictive, some are thinking about giving money and assets away to their loved ones now to avoid an inheritance tax bill. But make sure you fully understand the rules to avoid inadvertently running into a tax penalty.
Under current rules, you can usually give up to £3,000 away in gifts each year without having to worry about inheritance tax. Most gifts that exceed this will be classified as a “potentially exempt transfer”, meaning the gift-giver will need to outlive the gift by seven years to avoid an inheritance tax bill.
Something called taper relief kicks in after three years – meaning a reduced rate of IHT is applied if the gift-giver passes away at this point. The IHT rate falls further with each year that passes after the three-year point. For example, if someone dies 3-4 years after giving a gift, an IHT rate of 32% is applied. If they pass away 6-7 years after giving a gift, a rate of 8% applies.
The government points out that “taper relief only applies if the total value of gifts made in the seven years before you die is over the £325,000 tax-free threshold”. Any estates that are smaller than this amount would be covered by the regular nil-rate band.
“If you’re worried about inheritance tax, and you were planning to give your family gifts soon anyway, it may make sense to do so before the Budget, while you know where you stand,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.
She adds: “You can give £3,000 within your annual allowance, gifts from income, or start the clock ticking on a potentially exempt transfer. However, there’s a vital balance to strike here, so you’re not giving money away you can’t manage without, purely because you’re worried about tax.”
We share further details in: “Eight ways to reduce your IHT bill”.
