His Majesty’s Revenue and Customs (HMRC) raked in £3.9billion from inheritance tax receipts in the six months from April to September, the latest figures show.
This marks a £400 million increase from the same period in the previous year, continuing the upward trend fuelled by years of soaring house prices and frozen allowances.
New calculations from Wealth Club suggest the average bill could increase to £233,000 this tax year, with over 30,000 families having to hand over part of their inheritance to the tax man.
This is a steep nine percent increase from the £214,000 average paid just three years ago and a 12 percent rise in the number of estates paying the tax.
Commenting on the figures, Nicholas Hyett, investment manager at Wealth Club said: “Inheritance tax has found itself the unexpected centre of the UK’s political battlefield.
“The tax pulled in over £7billion for HMRC last year and the most recent set of numbers suggests that’s set to climb again. Both the average bill and the number of families paying inheritance tax are also set to rise in the years ahead, according to Wealth Club research.
“Whether you think inheritance tax is a great means of wealth redistribution or an unfair tax on those who’ve already been taxed once – the future of the UK’s most controversial tax is worth arguing about – and people are.”
The Government is rumoured to be considering abolishing inheritance tax altogether, while the Labour Party is looking at scrapping inheritance tax relief, known as Business Relief, for businesses passed on to family members.
Mr Hyett said: “It’s a genuine point of difference in a political landscape that is otherwise pretty bland. Neither approach strikes us as easy to implement, or really that likely.
“Scrapping inheritance tax will cost the Government revenues at a time when it needs all the cash it can get. And while scrapping Business Relief might pull in a little bit extra, inheritance tax’s unpopularity, even among those who don’t pay it, and the damage it could do to the UK’s small business sector and Alternative Investment Market mean it’s probably not a goer.”
Still, Mr Hyett said the current inheritance tax system does need fixing. He explained: “Inflation, rising house prices and frozen allowances are pushing more families within the reach of inheritance tax every year. Given they’re no wealthier than they were before, and possibly worse off given the cost of living crisis, it’s no wonder inheritance tax is the most unpopular tax in Britain.”
The nil rate band, which is the total asset amount up to which no inheritance tax needs to be paid, remains frozen at £325,000 until at least April 2028. Any assets that exceed this figure are then taxed at 40 percent.
With average house prices exceeding this figure, more families who wouldn’t typically consider themselves wealthy are being dragged into the tax net. However, there are a number of things people can do to minimise the chances of being hit with a hefty bill.
Mr Hyett said: “Give money away early. Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax-free on day one – as are certain smaller gifts. Timing is key as you can give unlimited amounts away but typically these take seven years to be completely inheritance tax-free. Of course, once you give away the money you’ve lost control. If you need it back for an emergency, that’s not an option.”
People can also invest in companies that qualify for Business Relief. According to Mr Hyett, these are typically inheritance tax-free after two years.
He pointed out: “Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control.”
Mr Hyett also suggested considering an AIM ISA, which qualifies for Business Relief. He explained: “ISAs are not inheritance tax-free. When you pass away, your loved ones could miss out on 40 percent of your hard-earned cash. AIM ISAs are a popular way around this. They are riskier but after two years they could be IHT-free.”
Those who donate 10 percent of their total estate to charity may be able to benefit from a 36 percent tax rate as opposed to 40 percent.
To qualify, Elsa Littlewood, a tax partner at BDO, said: “Check that your will is drafted in such a way that your gift will reach the 10 percent threshold and qualify your estate for the lower rate of IHT. For example, if you have specified a particular sum or asset to your chosen charity, it may be that your estate has increased in value so that the sum no longer amounts to at least 10 percent any more.”
Ms Littlewood also noted it’s important to check that the donation is to a qualifying charity, in particular, from April 6, 2024, only UK charities will qualify (i.e. EU charities are no longer included).
For more information about inheritance tax rules, thresholds and allowances, as well as legitimate tips to reduce the bill, read our inheritance tax guide.
