Inheritance tax receipts hit £3.5bn between April and August, according to the latest HMRC data, up £300mn on a year ago.
It means the government is on track to collect another record sum in death duties this year, with seven months still to go until the new tax year begins. Inheritance tax has been increasing in recent years thanks to frozen nil-rate bands. These have conspired with high inflation to leave families at the mercy of fiscal drag.
Last tax year (2023/24), IHT receipts totalled £7.5bn – the highest figure ever. This followed on from another record-breaking year of £7.1bn in 2022/23, leaving many looking for ways to reduce their inheritance tax bill.
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The nil-rate bands won’t be reviewed until 2028, which means IHT receipts are only heading in one direction unless the rules are unexpectedly changed. And with a £22bn shortfall in the public finances, any tinkering in the Budget is likely to make IHT rules more (rather than less) punitive.
“In our view, inheritance tax is ripe for reform,” says Jonathan Halberda, specialist financial adviser at Wesleyan Financial Services. “It was designed as a tax for the very wealthiest, but it’s now affecting more people than it was ever originally intended to.”
The Office for Budget Responsibility predicts IHT receipts will reach £9.7bn by 2028/2029.
How much can you pass on without paying inheritance tax?
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.
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 £290,000.
Meanwhile in London, the average house now costs £521,000, meaning combining your regular and residential nil-rate bands could still leave you with a sum of £21,000 for your descendant to pay tax on.
The good news is there are some strategies you can take to pass on more of your estate tax-free. For example, married couples and civil partners can combine their tax-free allowances to pass on an estate worth up to £1 million (£325,000 + £175,000 + £325,000 + £175,000).
Making use of gifting allowances is another tax-efficient way to pass on wealth. But make sure to read up on the gifting rules, as exceeding the annual allowance will mean you have to outlive the gift by seven years to avoid IHT entirely. Meanwhile, after three years, you can make use of a sliding scale known as “taper relief”.
Pensions are another tax-efficient way to pass on wealth, as they currently fall outside of the IHT net. However, expert bodies including the Institute for Fiscal Studies have called for the government to address these “unfair” loopholes, so there is no guarantee that the rules won’t change in the future.
Will Labour increase inheritance tax?
Chancellor Rachel Reeves will deliver her first Budget on 30 October, and the prime minister has warned it will be “painful” and involve “tough decisions”.
Reeves has accused the former Conservative government of leaving a £22bn black hole in the public finances, meaning she will need to raise revenue somehow to fund vital public services. Taxation will probably increase – and speculation has been rife about which areas could be in focus, from capital gains tax to pension tax relief.
The rate of inheritance tax is unlikely to go up, given it is already one of the highest tax rates at 40%. However, some experts have suggested Labour could consider charging capital gains tax on inherited assets, resulting in a ‘double death tax’ of more than 50%.
Meanwhile, Laura Hayward, tax partner at wealth management firm Evelyn Partners, suggests the residential nil-rate band and gifting allowances could be in focus.
“The latest IHT salvo in the great Budget debate has been fired by the Resolution Foundation, which this week urged the chancellor to abolish the £175,000 residence nil-rate band on October 30, in order to save the Treasury an estimated £2 billion,” she says.
“This comes on top of speculation that the chancellor could tighten up the seven-year rule on gifting by changing the ‘potentially exempt transfer’ rules to cut down on IHT relief, which has got some families wondering whether they should ‘set the seven-year clock ticking’ on a lifetime transfer now or in the next few weeks.”
