HMRC raked in £2.9bn from inheritance tax (IHT) between April and August 2022, up £300m from the same period last year, according to new figures released today.
The tax, which takes 40% of assets valued over £325,000 when someone dies, currently affects one in 25 estates but more people are getting caught in the net, according to Shaun Moore, tax and financial planning expert at Quilter.
He said, although the tax has always been “universally hated”, it’s historically only effected the very rich – between 2018-2019, 3.7% of UK deaths resulted in an inheritance tax charge. Today’s data, however, shows that more and more people are reaching the tax threshold.
Inflation has been a significant driver of this as people who would not typically consider themselves wealthy see the value of their assets soar, especially in the property market.
Financial firm Wealth Club calculated that the average inheritance tax bill was £266,000 this year, compared to £216,000 two years ago.
One issue is that the threshold has been frozen at £325,000 since 2009 and is set to remain at that level until 2026.
Since the current threshold was set, inflation in the UK has risen 43.5% and is set to increase rapidly as the cost-of-living crisis takes hold.
UK inflation since the current inheritance tax threshold was set
Source: FE Analytics
Newly appointed prime minister, Liz Truss, has stated that she’d like to review inheritance tax rules, but Alex Davies, CEO and founder of Wealth Club, said reform is unlikely anytime soon.
He said: “It’s hard to imagine IHT is top of the to-do list for Friday’s mini budget, especially with so many more pressing issues at hand.”
Although the extra £300m collected between April and August “is certainly needed” by the Treasury in this difficult time, Davies said that the government should consider cutting the 40% rate or raising the £325,000 threshold.
However, there are several routes that investors can take to reduce the amount they’ll have to pay in inheritance tax.
Simply making a will can be a good first step, according to Davies. Without one, assets can be split up in a way that you have not approved and “the taxman might end up with more than its fair share”.
People in the UK also have a £3,000 annual gift allowance that they can give out tax-free and can be combined to £6,000 if it is not used by the year’s end.
It may also be worth utilising your pension allowance – they are not usually subject to inheritance tax and in some cases, no tax at all. Davies said that “if you have any pension allowance left, make use of it”.