HMRC collected a record £7.1 billion in Inheritance Tax (IHT) in 2022/23, up £1 billion compared to the previous year.

With the Chancellor Jeremy Hunt announcing the freezing of the nil rate band until April 2028 in his Autumn Statement, it is expected that the Treasury will continue to rake in a record amount of Inheritance Tax in the coming years.

The frozen nil rate band means that more people’s estates will be subject to Inheritance Tax due to asset price inflation. You can read more about the tax changes that were unveiled in the Budget in our article What the 2022 Autumn Statement means for you.

The amount collected each year in Inheritance Tax had already been on the rise, thanks mainly to the rising value of property across the country. This led to more estates being valued at over the current nil rate band of £325,000, which has been frozen at this level since 2009. When the value of an estate surpasses the nil rate band, any amount over the threshold is subject to Inheritance Tax, which is currently set at 40%.

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However, despite house price growth starting to slow, with inflation spiralling and the government desperately looking for ways to alleviate debt and combat the cost of living crisis it’s almost certain that Inheritance Tax receipts will climb with each passing year.

Early projections from the Office for Budget Responsibility predicted a boost in IHT receipts, but not to this extent. Estimates suggested that IHT receipts would not exceed £6.8 billion until the 2025/26 tax year, but they have now done so three years early.

Stephen Lowe, group communications director at retirement specialist Just Group, commented: “Inheritance Tax receipts stormed to record highs this financial year as the Chancellor continues to benefit from frozen thresholds and soaring property prices through the pandemic.

“There seems to be no limit to the Treasury’s appetite for Inheritance Tax and given receipts for this financial year have already surpassed upgraded estimates, it looks set to be the goose that lays golden eggs for some time yet.

“It’s important that people regularly assess the value of their estates, including an up-to-date valuation of any owned property. Professional, regulated advice can also help people work out the total value of their estate, calculate how much tax they may be likely to owe and understand what options they have to manage that tax bill.”

If the nil rate band were to increase to keep up with inflation, it would rise to £338,000 in 2026/27 and £351,520 in 2027/28. Instead, the freeze means that more people will see their or their loved ones’ estates subject to taxation. According to separate calculations by Interactive Investor, because it has remained frozen for so many years, the inheritance tax threshold has reduced by £140,000 in real terms. The current £325,000 threshold currently would be worth £464,643 if it had been uprated every year in line with inflation since 2009.

What can I do to reduce my Inheritance Tax liability?

Historically, people have been able to mitigate the impact of Inheritance Tax by making use of annual allowances during their lifetimes.. For example, you can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. If you don’t use this annual exemption one year, you can carry it forward to the next tax year. However, any unused allowance can only be carried forward for one year, so if you don’t use it by the end of that year, it will be gone for good. Read more in our article Which gifts are exempt from Inheritance Tax?

For more ways to reduce the amount of Inheritance Tax your estate will have to pay, read our article Six ways to reduce inheritance tax bills.

Rachael Griffin, tax and financial planning expert at Quilter, said: “Historically IHT was viewed as a tax only for the very wealthy. However, with house prices remaining at such elevated levels while both the nil rate band and residence nil rate band are frozen until 2028, many families that might not consider themselves to be wealthy could find themselves facing an unexpected IHT bill.

“The ever-increasing tax revenue from IHT presents a conundrum for the government as we approach election season. Rumours are already rife regarding potential crowd-pleasing policy changes the government might enact to improve their chances of winning the next election. Some reports suggest inheritance tax may be ripe for reform, but considering it is becoming a powerful revenue generator, this government might find the prospect of lowering one of Britain’s most hated taxes a bitter pill to swallow. However, on the other hand, it is likely to drum up support.

“With unwelcome IHT bills rapidly becoming more commonplace, seeking professional financial advice is all the more important. IHT is a complex area of financial planning, particularly when it comes to the rules and restrictions of certain aspects such as the residence nil rate band, so professional support can help you plan appropriately and mitigate costs.”

To learn more about Inheritance Tax and how it is calculated, you can read our article Understanding Inheritance Tax.