Taxpayers can take steps to protect their wealth from inheritance tax as new figures reveal the Government’s coffers continue to swell from death duties.
HMRC collected £5.7 billion in inheritance tax between April and November 2024, marking a substantial £600 million increase compared to the same period last year.
The 11 per cent rise in receipts highlights the growing number of families being caught by the tax.
With multiple changes on the horizon affecting pensions, farming reliefs and business investments, experts warn the tax burden is set to increase further for British families.
The standard inheritance tax rate stands at 40 per cent on estates valued above £325,000 – a threshold that has remained unchanged since 2009.
The Government has extended the freeze on this threshold until 2030, as announced in the recent Budget. From April 2027, pensions will be added to taxable estates, providing an additional boost to Treasury income.
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Changes to Agricultural Property Relief will impact farming families, potentially forcing difficult decisions about their farms’ futures.
Modifications to reliefs for Alternative Investment Market shares and Business Relief are also expected to increase Government revenue.
Shaun Moore, tax and financial planning expert at Quilter, said: “Christmas has come early for the government, HMRC reveal inheritance tax receipts for the period of April to November 2024 climbed to £5.7 billion. More and more people are being ensnared by inheritance tax, and this will only increase.
“With the IHT threshold frozen until 2030, coupled with pensions being added to the taxable estate from April 2027, the government’s coffers will get a substantial top-up in the coming years.
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Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, advises those concerned about inheritance tax to consider making gifts sooner rather than later.
She said: “You can give £3,000 within your annual allowance, regular gifts from surplus income, or start the clock ticking on a potentially exempt transfer which falls out of your estate after seven years.”
However, she cautioned against hasty decisions: “There’s a vital balance to strike here, so you’re not giving money away you can’t manage without, purely because you’re worried about tax.”
Rising asset prices and positive house price growth have contributed to the increased tax take this year, she noted.
Stephen Lowe, group communications director at retirement specialist Just Group, predicts inheritance tax is heading for another record year. He warns that nearly 10 per cent of deaths could be subject to inheritance tax by the end of the decade.
Lowe added: “We encourage people to make sure they have an up-to-date valuation of their estate to help them understand if they are likely to incur IHT.” Professional financial advice can help people manage their estate efficiently, he added.
Legal experts Jenny Ray and Ingrid McCleave, DMH Stallard partners highlight several key strategies for reducing inheritance tax liability.
Assets left to spouses or civil partners are typically exempt from inheritance tax, as are charitable donations. Unused thresholds can be transferred to surviving spouses, potentially increasing the combined threshold to £650,000.
An additional main residence nil rate band of up to £175,000 is available when homes are left to direct descendants, potentially raising the total threshold to £1million for couples.
The partners note that leaving 10 per cent or more of an estate’s net value to charity can reduce the overall inheritance tax rate to 36 per cent.
“It cannot be understated how imperative it is to obtain legal advice to ensure that your charitable gift does not fail,” they emphasise.
Ray and McCleave explain there is also a crucial “seven-year rule” which explains gifts made seven years before death are tax-free, while those within this period may be subject to tax.
They said: “If you make a gift and survive for another seven years there will be no tax to pay on that gift. If, however, you die within seven years of giving a gift, it will potentially become taxable because it is deemed to remain in your estate for inheritance tax purposes.
“The tax may be tapered in respect of the amount above £325,000 gifted and paid at less than 40 per cent if it was given more than three years before your death.
They warn about “retaining benefit” – stating if you give away an asset but continue to benefit from it, the seven-year period won’t apply. For example, this might include living in a property one has given away or keeping an antique or work of art in one’s home having gifted the ownership of it.
“Taking professional advice from legal and financial professionals and ensuring your intentions are clear and well-documented is essential,” they advise via a Will.
The partners stress that tax efficiency isn’t the only consideration, emphasising the importance of ensuring gifts are legally valid to ensure that disputes are unlikely to arise in relation to whether a gift has taken place or whether a donor had capacity to give the gift.
