Inheritance tax receipts continue to surge, now 17% higher

Inheritance tax receipts totalled £1.4 billion in April-May this year – £0.2 billion higher than the same period a year ago, the latest HMRC data shows. 

This comes after the government collected a record-breaking £7.5 billion in inheritance tax (IHT) last tax year, suggesting we could be on track for another record high in the 2024/2025 tax year.

Frozen nil-rate bands are largely to blame. The current tax-free allowance is £325,000, with an additional £175,000 available to those leaving the family home to their children or grandchildren. We run through the rules in our explainer: “What is inheritance tax?”

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“The current £325,000 nil-rate band has been at that level since 2009,” explains Andrew Tully, technical services director at financial platform firm Nucleus. Meanwhile, the £175,000 residential nil-rate band was “introduced on a phased basis between 2017 and 2020”, and has also remained frozen ever since.

In the 2022 Autumn Statement, chancellor Jeremy Hunt said inheritance tax allowances would be frozen until 2027/2028. In recent years, these frozen thresholds have conspired with inflation to put families at the mercy of fiscal drag.

We look at the trend going forwards. Will families face an ever-rising tax bill? Have any parties announced IHT reforms in their election manifestos? And how can you slash your inheritance tax bill?

Will inheritance tax rise further?

So far, neither Labour nor the Conservatives have said they plan to increase inheritance tax rates. The standard rate is 40%, charged on the part of your estate that exceeds the nil-rate band. Likewise, neither party has announced plans to slash the nil-rate bands.

However, that doesn’t mean families won’t find themselves footing a higher bill. Nicholas Hyett, investment manager at Wealth Club, points out: “Freezes on thresholds over the last few years, partnered with decades of house price rises, have brought more and more estates into the tax band.”

When the £175,000 residential nil rate band was fully introduced at the start of the 2020/2021 tax year, the average UK house cost around £230,000. Today, it costs £281,000, according to the latest data from the Office for National Statistics. 

“The haul for the Treasury from IHT is likely to escalate in the coming years due to a particular demographic bump,” adds Laura Hayward, tax partner at wealth management firm Evelyn Partners.

“As the wealthy baby boomer generation dies off in the next couple of decades, there will be a massive transfer of wealth.”

What will the general election mean for inheritance tax?

While Labour was tight-lipped on inheritance tax in its manifesto (only pledging to crack down on the use of offshore trusts to shield assets), some have suggested it is conspicuous by its absence. No mention of it now could mean plans to make changes further down the line.

Meanwhile, many Tory voters will be disappointed by Rishi Sunak’s relative silence on the topic, particularly after Hunt referred to the tax as “profoundly anti-Conservative” in an interview with The Telegraph in May. 

There is no mention of the tax at all in Sunak’s 76-page manifesto, and the only pledge the party has made on the campaign trail is to maintain agricultural property relief. This allows some farming land to be passed on free from inheritance tax.

Recent research from Hargreaves Lansdown revealed that one in six (16%) would be more likely to vote for a party with plans to cut inheritance tax. However, the same measure was highly unpopular with another 12% of survey respondents. This highlights just how divisive the issue is.

How to cut your inheritance tax bill

There are a few things you can do to help reduce your IHT bill – “whether that’s making gifts in your lifetime, passing pensions on tax free, [or] investing in certain qualifying AIM shares,” says Hyett. 

Married couples also enjoy inheritance tax perks. They can pass their estate on to their spouse without any immediate tax implications. Furthermore, if one partner doesn’t use up their nil-rate band, they can pass the remainder on to their spouse to use in the future too. 

In theory, if a married couple were to combine all of their allowances (nil-rate band and residential nil-rate band), they could pass on an estate worth £1 million to their children without any tax being due (£325,000 + £325,000 + £175,000 + £175,000).