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This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
Note: this article was updated to reflect the latest Inheritance Tax receipts and new comment for May. It was first published in March 2024.
The latest figures on Inheritance Tax (IHT) receipts from HMRC show that families paid £200m more between April 2024 and May 2024 than at the same point last year.
That puts potential receipts for the 2024/25 tax year on course for a ‘record-breaking’ amount, according to Rachael Griffin, Tax and Financial Planning expert at Quilter:
“The government’s IHT receipts hit an unprecedented £7.5 billion in the last financial year, surpassing the previous record of £7.1 billion.
“It appears we are on track to see yet another record-breaking tax take this tax year as IHT receipts reached £1.4 billion for April to May 2024.
“Frozen thresholds and IHT policy has failed to keep up with inflation and therefore these figures will continue to increase.”
While the notion of your loved ones paying 40% tax on your hard-earned money may feel difficult to stomach, the truth is that only 4% of estates are liable for IHT, according to the most recent HMRC statistics.
The nil rate band - the amount you can pass on when you die without having to pay IHT currently stands at £325,000 – and has been frozen until 2028 at the earliest, meaning more estates will get pulled into paying the tax through fiscal drag.
The latest receipts come as the country gears up for a general election, but big reforms to the tax have been absent from many party manifestos.
“Even if a new Government is shy of making transparent and potentially unpopular decisions to tax the passing on of wealth more harshly, then fiscal drag is doing a similar job behind the scenes anyway,” says Laura Hayward, Tax Partner at professional services and wealth management firm Evelyn Partners.
“The Office for Budget Responsibility forecasts that the share of deaths resulting in the payment of inheritance tax will rise to 6.3 per cent by 2028–29, the highest level since the 1970s.
“That proportion was as low as 2.7 per cent in 2009/10. Revenue from inheritance tax and its predecessors has increased over time in real terms, from around £2billion in 1980/81, to £7.5billion in 2023/24, and will reach almost £9billion by 2028/29 (all amounts in 23/24 prices).”
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Bereaved families have paid out more in inheritance tax (IHT) than ever before, according to the latest government figures.
Between April 2023 and March 2024, HMRC took £7.5bn in IHT payments, £400m higher than the previous year and exceeding the already record-breaking £7.1 billion achieved in the 2022/23 tax year.
“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% since then,” says Laura Hayward, Tax Partner at professional services firm Evelyn Partners.
“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 £2.6 trillion of equity tied up in their homes, which the next generation or the one after are set to inherit.”
The ‘nil rate band’ is the amount you can pass on when you die without having to pay IHT. It currently stands at £325,000 – and has been frozen until 2028 at the earliest. The Office for Budget Responsibility predicts IHT receipts could rise to £9bn by this point as more family wealth crosses the nil rate band.
Despite the pandemic and the cost-of-living crisis putting a dampener on the housing market, the value of the average home in the UK has more than doubled in the last 30 years – increasing by a staggering 153% (adjusted for inflation), according to the Nationwide House Price Index.
“Higher property prices coupled with the frozen thresholds have increased the number of families falling in the scope of IHT,” says Rachael Griffin, Tax and Financial Planning Expert at Quilter.
“While growth has slowed in the housing market, it hasn’t seen the drop in prices some had been expecting. According to the government’s house price index, the average UK home now costs £281,000, fast approaching the frozen inheritance tax nil rate band of £325,000 [where IHT becomes liable].”
But, as experts told Saga Money, it’s not just rising house prices that are to blame. The freezing of IHT allowances is also an important factor – the nil rate band would now stand at about £489,700 had it risen with inflation – as well as income increasing in other areas too.
“This [increase in families paying IHT] is mostly down to the steady rise in house prices over more than a decade, but other asset prices have also risen – with stock markets around the world beating their all-time highs in recent months,” says Nicholas Hyett, Investment Analyst at Wealth Club.
"With tax thresholds frozen this has inevitably led to higher overall IHT take – it’s a conscious decision on the government’s part, technically known as fiscal drag.”
While the notion of your loved ones paying 40% tax on your hard-earned money might be difficult to stomach, the truth is that only 4% of estates are liable for IHT, according to the most recent HMRC statistics.
However, this is likely to increase in the coming years, as Griffin explains:
“There’s been a growing impact on middle-income families who find themselves liable for a tax historically associated with the wealthy, and this is likely to continue while the threshold is frozen.
“The Institute for Fiscal Studies recently reported the number of estates paying inheritance tax is set to rise, from 4% in 2020-21 to over 7% by 2032-33, which we estimate would result in almost 50,000 families facing IHT bills.”
While the number of estates paying IHT is low, the impact on families might be higher: “If we’re talking about “families” rather than “estates” the number may already be around 7%,” Hyett adds.
“Assets can be passed to a spouse free of charge, which means married couples often only incur an inheritance tax charge when the second spouse dies.
“Take a family where the first spouse dies and leaves everything to their surviving partners: this does not incur any IHT liability. When the second partner dies, IHT is charged on their estate. In the statistics this shows up as 50% of estates incur an IHT bill, but 100% of families in this example are affected by IHT.”
If you want to maximise the value of any inheritance you plan to leave, it’s important to find out where you stand. You can do this by calculating the approximate current value of your estate.
Jonathan Halbarda, Specialist Financial Services Adviser at Wesleyan Financial Services, explains: “When valuing you should include everything you own – from property to land, savings, investments and money that you have in cash. If you own property abroad, this needs to be factored in too, as well as any assets that you hold in trusts, for which you are the beneficiary.
"Finally, think about any gifts that you have made in the last seven years, such as cash to children or grandchildren, or valuables you’ve passed on. These will need to go in too.
“Once you have a total, you can subtract any debts – such as anything you have left on your mortgage, or any loans you have. This will give you the value of your estate, and a broad understanding of your likely position.”
Although the nil-rate band, or threshold, for IHT is £325,000, you may well be able to pass on more than that.
If, for example, you are passing on a family home to children or grandchildren, you can pass on a further £175,000 tax free, using the additional ‘residential nil rate band’, taking your total allowance to £500,000.
If you are married or in a civil partnership, the person that dies first can also pass on money to their spouse tax free. This means that married couples can potentially pass on up to £1m between them.
Reducing your IHT bill, so you don’t pay more than is necessary, can quickly become complicated – so professional advice is key.
The most straightforward way of lowering your IHT bill is to give away money during your lifetime that would have become taxable once you've died. This kind of gift is known as a ‘potentially exempt transfer’ (PET).
It's subject to a gradually-reducing rate of IHT over time and becomes totally free of the tax if you don’t die within seven years.
With IHT currently charged at 40%, this could be the difference between a beneficiary getting £1,000 now, or just £600 after you've passed away.
There are number of other exemptions that allow you to give money away, free of IHT.
This includes a £3,000 annual allowance, which can be made up of one gift to one individual or several smaller gifts to multiple people.
There are also dedicated allowances for wedding gifts, which are currently £5,000 for children, £2,500 for grandchildren and £1,000 for anyone else.
On top of that, there’s an unlimited exemption for regular gifts, if you can demonstrate they're from your surplus income and that your standard of living didn’t suffer as a result.
Gifts beyond these exemptions become PETs, and will only be free of IHT if you live for a further seven years.
However, giving money away isn’t always practical. It’s crucial you don’t harm your future financial security and give away money you might need later when you get older, for things like care home fees or alterations to your house.
But there are other ways to reduce an IHT bill. Adrian Lowery, Senior Media Relations Manager for Evelyn Partners points out some pensions are not included in your estate for IHT purposes, so can be a helpful planning tool if you've got multiple sources of income.
“As defined contribution pensions remain exempt from IHT, one simple thing some savers can do is - as far as possible - leave their pot untouched and use other assets to finance their retirement,” he says.
Hyett says it’s also important not to leave it to the last minute: “The crucial thing is that people do think about estate planning. Many people leave it too late – after all, none of us want to think we’re about to die.
“[However], the later you leave estate planning, the fewer options you have.”
Whether you are thinking about giving away a lump sum to help a family member or are trying to avoid paying IHT altogether, it’s important to get professional advice.
Estate planning can be complicated, and you might find there are some unintended consequences – especially if you give away money you come to need later.
So, with the right professional advice, you can put in place a plan that helps your family without jeopardising your own financial wellbeing.
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