Grieving families paid some £3.7billion in inheritance tax (IHT) in the first five months of the year as the stealth tax net dragged in more of the squeezed middle classes.
The taxman raked in £200million more in the first five months of the financial year than it did in the same period last year – a 5.7 per cent hike, official HM Revenue & Customs figures show.
Britain’s most-hated tax is expected to deliver the Treasury a record £9.1billion this tax year, the Office for Budget Responsibility forecast earlier this year.
And as receipts continue to climb it is likely the Government’s coffers will receive this record boost.
Stephen Lowe, of financial firm Just Group, said: ‘With rising asset prices, frozen thresholds and last year’s reforms, IHT looks set to deliver a bumper tax take for the fifth year in a row.’
Families who lost a loved one handed over £3.7billion to the taxman in just five months
Death duties are levied at 40 per cent on an estate over a £325,000 threshold and those who leave their property to direct descendants have an extra £175,000 tax-free allowance.
But the £325,000 threshold – known as the nil-rate band – has been frozen since 2009 which has pulled middle-income families into the tax net as their asset and property values soar.
This process – known as fiscal drag – means families who may not consider themselves very wealthy, especially those in the south where property prices have seen chunky rises, are facing IHT bills.
Chancellor Rachel Reeves announced in last autumn’s Budget the freeze on these thresholds will continue until April 2030, in another sting for squeezed middle-class families.
But there will be no respite for bereaved loved ones in the coming years as unused pension pots will be dragged into the IHT net from April 2027.
This punitive move has upended retirement planning and will land even more families who have just lost a loved one with a tax bill.
Plus, from next April agricultural property relief and business property relief will be curbed – a 100 per cent relief will be limited to £1million per person in a major blow to family-owned farms.
Ian Dyall, of wealth manager Evelyn partners, says: ‘This will significantly expand the scope of taxable wealth – not just in the well-publicised case of farms but much more widely across quite modest family businesses of all sorts.
‘The rise in receipts is not just a fiscal story, it’s a wake-up call.
‘Many households are sleepwalking into substantial tax bills.
‘But families should also remember that estate planning is not just about tax efficiency, it’s about ensuring that wealth is passed on in a way that meets the family’s objectives and avoids unnecessary financial stress for beneficiaries, while in some cases preserving business continuity.’
Just one in 20 estates is currently liable for an IHT bill but this is soon set to soar in the coming years as these punitive measures wreak havoc on family legacies.
The taxman will be raking in more than £14billion in death duties by 2029-30, the OBR forecasts.
Experts believe there is room further reform to IHT at the autumn Budget, where it is rumoured Ms Reeves will launch an attack on the gifting rules that allow people to pass on wealth free of tax in their lifetime.
Nicholas Hyett, of investment service Wealth Club, says: ‘It continues to be a cash cow for HMRC. While wealth taxes, IHT’s uglier sibling, will be in the spotlight in the run up to the autumn Budget it wouldn’t be entirely surprising to see further tinkering with IHT too.’
Mr Lowe says it’s useful to keep track of the valuation of your estate, including a recent assessment of property wealth, do you can plan to mitigate the estate’s IHT bill.
‘Estate planning is complex and difficult, so many families may find it beneficial to seek professional financial advice to understand their circumstances, the impact of the IHT regime and their options for minimising tax liabilities,’ he says.
How to slash your inheritance tax bill
There are ways you can hand over a legacy to children and grandchildren while keeping your hard-earned cash out of the Chancellor’s clutches.
If you leave your property to a direct descendant – such as children or grandchildren – you get an extra tax-free allowance of up to £175,000. That means an easy way to prevent a huge tax bill after death is to give your home to your children.
Between a couple, that means you can pass on a £1million family home free of the death duties.
If you want to pass on any cash or material gifts, make them earlier instead of later.
This is because gifts that you give away during your lifetime are free from IHT so long as you survive for seven years after giving them.
Die within seven years and they count towards your tax-free allowance of £325,000, so they reduce the amount of your estate that can be passed on without incurring a bill.
Gifts made over your nil-rate band of £325,000 benefit could benefit from taper relief.
The closer to the full seven years you survive, the less tax your beneficiaries need to pay.
For a payment made in the last three years before death, the full 40 per cent is levied.
But any gifts made four to five years ago face a 24 per cent charge, while those made five to six years before your death have a 16 per cent IHT rate.
Those given six to seven years ago are charged at 8 per cent. Make payments sooner rather than later to lessen the chance that your loved ones will foot a huge 40 per cent tax bill.
Plus, you can make the most of your gifting allowances to pass on wealth tax-free while you are still alive.
Everyone gets a £3,000 annual gift allowance, which is exempt from their estate.
Plus, if you didn’t use this year’s allowance you can carry it forward to the next tax year, but it can’t be carried forward any further.
This means a couple could give away up to £12,000 completely free of IHT in one tax year. The seven-year rule does not apply here, so if you die within that period of making these gifts there is still no IHT payable.
You can also give away an unlimited number of small gifts up to £250, so long as you haven’t used another IHT allowance on the same recipient.
Another nifty trick to reduce the tax bill on your estate is to make a tax-free gift to someone getting married or entering a civil partnership.
You can give £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else.
But these gifts need to be made ‘in consideration of’ a marriage or civil partnership so payments must be made just before it takes place and not after.
Growing numbers of families are also considering putting life insurance policies into trust to pay any potential tax bill.
These pay out to your loved ones when you die and if they are placed correctly into trust they are treated as if they are not part of your estate – and therefore free of inheritance tax.
You can appoint one or more beneficiaries who will be paid the full policy sum when you die.
However, this can be a costly planning tool and may come with risks.
For example, you may forfeit the cover if you stop paying the premiums at any point.
Once you start paying it, it can be difficult to increase your cover should your IHT liability rise. Seek expert advice before going ahead.
Arguably the most generous allowance is known as gifts out of normal expenditure, where you can gift an unlimited amount of money.
However, there are strict criteria you must meet. The payment must be regular, out of income and must not affect your standard of living – and you must keep good records.
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