Inheritance tax receipts have surged by 9% in the period from April to August this year, reaching £3.5 billion, according to the latest data from HMRC. This represents a £300 million increase compared to the same time last year, putting the government on course for another record-breaking year of inheritance tax (IHT) collection.
With seven months remaining until the end of the current tax year, the rise in receipts has many questioning what could come next. The freeze on the nil-rate bands, which has been in place since 2009, along with rising inflation, has left more families than ever facing higher IHT bills, despite the tax originally being designed for the wealthiest individuals.
Inheritance Tax Receipts – A Record Year
Last year (2023/24) saw a record-breaking £7.5 billion collected in inheritance tax, following £7.1 billion the previous year. Many are now looking for ways to minimise their IHT obligations. As house prices continue to rise, families are finding themselves caught in the fiscal drag, with more of their estate subject to the 40% inheritance tax rate.
The current tax-free allowance sits at £325,000, with an additional £175,000 allowance available for those passing on a family home to children or grandchildren. These allowances have remained stagnant despite increasing property values. For instance, the average UK house price was around £230,000 when the residential nil-rate band was first introduced in 2017. Today, that figure has risen to £290,000, leaving families with less flexibility to avoid hefty tax bills.
Strategies to Reduce IHT Liability
While the government is not expected to revise the nil-rate bands until 2028, there are several strategies families can use to mitigate their IHT liabilities. Married couples and civil partners, for example, can combine their tax-free allowances, allowing them to pass on an estate worth up to £1 million without incurring inheritance tax.
Additionally, making use of annual gifting allowances can be a tax-efficient method of reducing an estate’s value. However, it is important to keep within the limits, as exceeding the allowance requires the gift to be made at least seven years before death to avoid IHT. Pensions are another useful tool, as they currently sit outside the inheritance tax net.
Budget Speculation and Potential Changes
Chancellor Rachel Reeves is expected to deliver her first Budget on 30 October, and it is anticipated that tough decisions will need to be made. With a £22 billion gap in public finances, many expect Reeves to look at taxation as a way to raise revenue, leading to speculation that inheritance tax rules could be tightened further.
Some experts have suggested that the government might consider changes to capital gains tax on inherited assets, which could create a ‘double death tax’ exceeding 50%. Additionally, there are concerns that the £175,000 residence nil-rate band could be abolished, and there could be revisions to the seven-year gifting rule.
In the meantime, families looking to reduce their inheritance tax bill are advised to consider starting the clock on lifetime gifts or reviewing other tax-efficient strategies to safeguard their wealth for future generations.
