The latest data from HM Revenue and Customs (HMRC) reveals that Inheritance Tax Receipts (IHT) are set for a record high this financial year, after reaching £6.8 billion between April and February.
This is a £400 million rise compared to the same period a year ago and as a result, experts at wealth management firm Evelyn Partners believe the Treasury is on course to take £7.54billion from IHT in the 2023/24 tax year.
It follows IHT receipts also hitting an all-time high last financial year when a £1 billion boost meant a £7.1 billion rake in for 2022/23.
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Nicholas Hyett, investment manager at Wealth Club said: “One in every 25 estates pay inheritance tax, but the freeze on inheritance tax thresholds, paired with inflation and decades of house price increases is bringing more and more into the taxman's sights.”
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And whilst there was hope for reform or for the tax to be scrapped altogether at the Spring Budget, nothing was mentioned by the Chancellor on the subject.
Frozen IHT threshold
With the IHT threshold still frozen, more estates are being pulled into paying the tax, experts say, as rising house prices are increasing the value of properties- otherwise known as fiscal drag.
The latest Nationwide house price index (HPI) shows average property prices were up 1.2% in the year to February, while the Halifax HPI revealed the value of homes was up 1.7%.
“Even without a wave of wealth being transferred, more estates, and more assets in each liable estate, are being dragged over the threshold at which IHT kicks in, which has been frozen at £325,000 since April 2009,” says Laura Hayward, tax partner at wealth management firm Evelyn Partners.
“The modest property downturn of the last year or so seems to be over, so with the residential nil-rate band also frozen at £175,000, the trend of families or individuals with modest levels of wealth mostly held in property being subject to a 40% tax is likely to continue,” Hayward adds.
Plus, experts at Evelyn Partners say IHT receipts are set for even further growth in the next two decades, as “older generations have as much as £2.6trillion of equity tied up in their homes, which the next generation, or the one after, are set to inherit.”
How to cut your IHT bill
With the end of the tax year around the corner, it's a good time to look at ways to reduce your IHT bill.
One way you can reduce your IHT bill is to put more into your pension. “As defined contribution pension pots are very IHT-efficient, some savers might look to use up their annual pension allowance with extra contributions”, says Hayward.
Experts also home in on using your gift allowance by passing your assets to a loved one to eliminate the tax. You get a £3,000 gifting allowance each tax year, and if you don’t use all of it up, you can roll it over to the next year.
Hyett from Wealth Club adds: “It’s also possible to give up to £250 each year to however many people you wish, and make wedding gifts of up to £5,000 to your child; £2,500 to your grandchild; £2,500 to your spouse or civil partner and £1,000 to anyone else.
Beyond these annual allowances, you can pass on as much as you like IHT free so long as you live for at least seven years after giving money away.”
Making a will can also cut your IHT bill. The most important aspect to look at here is leaving your money or assets to your spouse or civil partner, as this is tax-free.
