HMRC collected a record £7.5 billion in Inheritance Tax (IHT) in the 2023/24 tax year, up £400,000 compared to the previous year.
The main tax-free allowance of £325,000 hasn’t changed since 2009 and the residence nil-rate band, which allows you to leave up to £175,000 of the value of your home tax free, hasn’t changed since 2020.
With these bands frozen until at least April 2028, it is expected that the Treasury will continue to rake in a record amount of Inheritance Tax in the coming years.
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%.
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.
The Office for Budget Responsibility noted last month that IHT receipts are set to hit £9.7billion in 2028/29, which will be 0.30% of GDP – twice the 0.15% it was in 2009.
Laura Hayward, Tax Partner at professional services and wealth management firm Evelyn Partners, said: “This record IHT haul for the Treasury is hardly surprising given the quite purposeful freezing of the tax-free allowance since as far back as 2009. The average UK house price alone has increased by approximately 82.7 per cent since then.
“With no end to the freeze in nil-rate bands in sight there will be an escalation in IHT liabilities, if rules remain the same – not least because there is a massive transfer of wealth in the offing in the next couple of decades. Research shows that the older generations have as much as £2.6trillion of equity tied up in their homes, which the next generation or the one after are set to inherit.
Separate research carried out by NFU Mutual found that had they kept pace with inflation, the main tax-free allowance would be worth almost £500,000 per person and the residence nil rate band would now be more than £210,000, meaning couples with children could leave a combined total of £1.4m tax free.
Sean McCann, chartered financial planner at NFU Mutual, said: “The average inheritance tax bill now stands at £213,000. Although this is skewed by the wealthiest taxpayers, increases in property prices, and frozen tax-free allowances mean that a growing number of families are facing a liability.
“There have been reports that the Government is actively considering scrapping the tax in the run up to the election as a potential vote winner; even if it doesn’t materialise, there’s no doubt that it is ripe for reform.”
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. Regular gifts from your income which don’t impact your normal standard of living are also immediately exempt from Inheritance Tax. 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.
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