The stealth tax raider’s creeping closer to homes all over Britain – so are YOU in a danger zone?

Thousands of families in the Midlands and the North of England are being dragged into paying inheritance tax for the first time. Official figures seen by The Mail on Sunday unveil the extent to which the Government’s stealth tax grab is ensnaring more families whom the tax was never designed to catch.

For decades, well-off families in London and the South of England have been the biggest payers of inheritance tax on their family fortunes following the death of a loved one. Yet inheritance tax was only ever intended to affect the very wealthiest households.

Now spiralling house and asset prices – combined with the long freeze on tax allowances – mean that growing numbers of middle-class households must pay it.

Four per cent of all estates are now liable to inheritance tax. There are areas around the UK where for the first time the number of estates breaching the inheritance tax allowance is soaring, we can unveil.

The number of tax-paying estates in the North-East of England soared by 27 per cent between the financial years 2019-20 and 2020-21, according to the latest Government data.

A Freedom of Information ask submitted by wealth manager Quilter and seen by this newspaper shows that the West Midlands recorded the second largest percentage growth in England, with 24 per cent more families paying inheritance tax than they did in the previous year.

In Yorkshire and the Humber an extra 18 per cent of estates paid inheritance tax. However, the average bill paid by households in the area fell by £28,000 – an indication that families with smaller estates are increasingly caught by the tax, pulling the average bill down.

The value of the average inheritance tax-paying estate in the region fell by £70,000 compared with the previous year, to £1.27 million, suggesting more families have just breached the threshold.

In the East Midlands, the average inheritance tax charge dropped by £52,000, while the number of estates affected rose by 13 per cent. The average size of estates that paid the tax fell by £130,000 to £1.17 million over a year.

Nor is the rise confined to England. In Northern Ireland, the number of taxpaying estates rose by almost a third in a single year – the highest rise in any of the UK’s 12 regions and countries. In Wales the figure was 13 per cent and in Scotland 8 per cent.

Shaun Moore, of Quilter, warns that one key factor in the invidious change is that a greater number of less wealthy families are being stung for the first time.

Half a million to pay death duties

The tax became a focus of concern this summer after internal HM Revenue & Customs forecasts revealed that an extra 49,400 grieving families would be dragged into paying inheritance tax this year. The taxman was forced to revise its previous estimates, increasing them fourfold from 13,400, a change that it blamed on high inflation.

Chancellor Jeremy Hunt faced mounting pressure to cut the death duty. He was widely expected to halve the inheritance tax rate in his Autumn Statement last month, but he disappointed Conservative MPs by leaving the tax unchanged.

Many households would not have paid any tax if the thresholds had increased in line with inflation.

The main threshold – the so-called nil-rate band that allows you to pass on the first £325,000 of your estate (property, shares and cash) free of tax – has been frozen since 2009 and will remain so until at least 2028, the Government has said. Anything above this is usually taxed at 40 per cent.

Couples who are married or in a civil partnership can combine their allowances, so that when the second partner dies £650,000 of the estate is tax-free.

Those who are leaving a family home to direct descendants – children or grandchildren – can effectively raise their tax-free allowance up to a total threshold of £500,000 (or £1 million for a couple).

This is because there is a second allowance of up to £175,000 (or £350,000 for a couple) specifically for property passed on in this way known as the residential nil-rate band. However on bigger estates this is cut by £1 for every £2 that the estate is worth more than the £2 million.

Despite the concessions, a growing number of estates are breaching the nil-rate band threshold due to property price increases.

If the £325,000 figure had tracked inflation since 2009, when it was last increased, it would be worth £506,000 today, according to Quilter.

The average price of a home in the UK has nearly doubled since then, from £165,314 in September 2009 to £291,385 in September this year, Land Registry figures show.

Moore says: ‘Inheritance tax was once viewed as a tax on wealthier individuals, but the reality is that the average UK property is less than £50,000 short of the standard nil-rate band.

‘With the nil-rate band and residential nil-rate band frozen until 2028 and house prices still high, many more people could face paying an inheritance tax bill unexpectedly.’

In August, The Mail on Sunday warned that more than half a million families would be forced to pay inheritance tax in the next ten years.

The Office for Budget Responsibility estimates that by 2027-28 the Government will be making £8.4 billion a year from inheritance tax compared with the £5.76 billion made in 2020-21.

Families pay £24,000 more in inheritance tax

An additional 4,000 estates brought the total subject to inheritance tax to 27,000 across the UK for the 2020-21 tax year. The sum paid increased by £24,000 on average, analysis by Quilter of Revenue data finds.

In England, families paid £28,000 more than in the previous year, as rising house prices coupled with the frozen threshold forced many to hand over more than ever.

The largest growth was in the capital, where the average inheritance tax-paying estate handed over an extra £100,000, according to Quilter. This is largely down to soaring house prices in London, where the average home rose in value from £496,000 in December 2020 to £537,000 in September this year.

Moore says: ‘With taxable estates in London now averaging £1.73 million, largely driven by property values, it’s clear that more and more families could find themselves liable for inheritance tax.’

Properties accounted for a third of the value of the average estate in the UK. Securities and cash, which includes money held in Government bonds, Premium Bonds, stocks and shares and bank accounts, made up 46 per cent of estates. Other items, such as furniture, jewellery and art made up the remaining portion, according to the Revenue.

In London, property represented 42 per cent of estates. This was followed by the South-East and East of England, where it represented 38 per cent.

Investments and cash were the largest component of estates in Scotland, at 58 per cent, followed by the North East of England and Wales, where it made up 56 per cent.

How Christmas giving can cut your tax bill

Stealthy: Families pay £24,000 more in inheritance tax

This can be a good time of year to make sizeable gifts to family that not only reduce the size of your estate but give younger generations a boost.

You can give up to £3,000 a year without having to pay tax. This can go to one person or be split between a few. If you did not make use of this allowance last year, you can still use it up by giving £6,000 this tax year.

You can also give £250 to as many people as you want if you have not used another allowance on the same person. However, these allowances have been frozen for about 40 years, which Moore describes as ‘ludicrous’. He says: ‘Had they risen with inflation they would be worth over £10,000 and about £1,000 respectively.’

You can give larger amounts and assets to friends or family to potentially reduce your inheritance bill: from furniture and jewellery to antiques and cash.

However, the gift is tax-free only if it was handed to them more than seven years before your death.

Crucially, keep a record of what you give, to whom, when it was handed over and its value. Otherwise, it’s up to your family to furnish proof that the gift was made more than seven years ago.

If the gift is liable for inheritance tax, it is the recipient who has to pay, and they may not be able to confront a surprise tax bill, possibly having spent the money, warns Ian Dyall, head of estate planning at wealth manager Evelyn Partners.

He says a lesser-known trick to passing on your wealth is making regular payments to someone of your choosing out of your income.

This can be a very useful exemption which allows you to make uncapped, regular gifts, free of inheritance tax, so long as it does not affect your normal standard of living. These regular payments must be using income, such as from employment, rent, a defined benefit pension or dividends on investments. It cannot be paid from capital you make, which is where you sell down investments.

Dyall adds: ‘Even modest lifetime gifts could come in useful as a way of saving executors and beneficiaries the rigmarole and expense of settling inheritance tax before probate.’

If anyone is getting married, this may be another chance to hand money to younger generations. You can give your child up to £5,000 when they get married or enter a civil partnership, £2,500 to a grandchild or great-grandchild and £1,000 to any other person. This can be combined with another exemption (but not the small gift exemption), meaning you may be able to transfer a greater amount in total.

Gifts between spouses or civil partners living in the UK, and gifts to charities and political parties are also inheritance tax exempt. Dyall says: ‘The good news is that, done properly, wealth transfers in lifetime can be advantageous on three counts: they can give the recipient a much-needed financial fillip, they allow the giver the satisfaction and pleasure of making the gift, and they can also reduce the inheritance tax payable on an estate when the giver dies.’