The latest figures from HM Revenue and Customs (HMRC) show that inheritance tax receipts increased to £3.2 billion in the five months from April 2023 to August 2023. This is a £300 million increase from the same period in the previous year, and continues the upwards trend over the last decade.

One in every 25 estates pay inheritance tax, but the freeze on inheritance tax thresholds, decades of house price increases and high inflation are bringing more and more estates above the threshold.

For those that are paying this death tax, Wealth Club calculations suggest the average bill could increase to just over £234,000 this 2023/24 tax year. This is a 11% increase from the £214,000 average paid just three years ago.

Inheritance tax is typically paid at a rate of 40% over certain thresholds, although you can pass on money IHT free to your spouse or civil partner, who will then also inherit your allowance for when they pass away. The main threshold is the nil-rate band and applies to the vast majority of people in the UK, enabling up to £325,000 of an estate to be passed on without having to pay any IHT. That has been unchanged since 2009. However, there is also a Residence Nil Rate band worth £175,000 which allows most people to pass on a family home more tax efficiently to direct descendants, although this tapers for estates over £2 million and is not available at all for estates over £2.35 million.

Nicholas Hyett, Investment Manager at Wealth Club said:

“The Treasury raked in an extra £300 million from inheritance tax from April to August 2023, compared to the same period a year earlier. This increase is being fuelled by years of soaring house prices and frozen allowances.

While just 4% of estates pay inheritance tax at the moment, given the nil-rate and residence nil-rate bands have been frozen for years people with more regular incomes and average value homes will end up getting caught out by this most hated of taxes. Moreover, with the government’s wallet under pressure from all angles, there’s unlikely to be any respite soon.

The good news is that there are still lots of legitimate ways to pass on money free of inheritance tax, which is why inheritance tax is referred to as a ‘voluntary tax’ in some circles.”

Those concerned about inheritance tax should consider;

Giving money away early. Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax free on day one – as are certain smaller gifts. Timing is key as you can give unlimited amounts away but typically these take seven years to be completely inheritance tax free. Of course, once you give away the money you’ve lost control. If you need it back for an emergency, that’s not an option.

Investing in companies that qualify for Business Relief. These are typically inheritance tax free after two years. Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control.

Investing in an AIM ISA. ISAs are not inheritance tax free. When you pass away, your loved ones could miss out on 40% of your hard-earned cash. AIM ISAs are a popular way around this. They are riskier but after two years they could be IHT free.”