Inheritance tax payments hit £300m

More people getting caught by inheritance tax, as HMRC collects £300 million this year

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Soaring house prices coupled with a freeze on tax breaks means the government has seen a £300m boost to its coffers in inheritance tax payments.

You may think inheritance tax only applies to the wealthy or those leaving vast country estates behind – but rising house prices and static tax breaks mean more families could face being forced into paying inheritance tax when a loved one dies.

Everyone enjoys an inheritance tax allowance of £325,000. The tax is only charged if your estate is worth more than this threshold, which is known as the ‘nil rate band’. 

If you’re passing on the family home, then another tax-free allowance ‒ the residence nil rate band may apply.

According to HM Revenue and Customs (HMRC) - between April and August this year it received a whopping £2.9bn in inheritance tax – that’s £300m more than the same time last year.

Tax and financial planning expert at Quilter, Shaun Moore, said: “New data from HMRC shows that as house prices march ever higher so does the tax take from inheritance tax (IHT).”  

“More and more people are getting caught in the IHT net, partly because of soaring property prices. The fact that the ‘nil rate band’ and the ‘residence nil rate band’ will remain frozen until 2026 does not help either”.

Andrew Tully, technical director at Canada Life, said: “The tax has now delivered almost £3bn to the taxman since April, £0.3bn higher than a year earlier and the frozen thresholds mean it has already doubled its tax take from IHT over the last 10 years”

“Residential property makes up the largest share of most estates and persistently rising house prices across the country will drag more and more unsuspecting people into the tax” 

Property prices have risen 10% over the last year according to the Nationwide Building Society. This has boosted the value of the average home by £50,000 over the past two years and means the average house price now stands at £273,751.

Can you avoid paying inheritance tax?

There are ways to legitimately reduce or wipe out any potential IHT bill but as with any form of tax -  the rules can be complicated.

Inheritance tax is charged on your estate when you die. This  means everything you leave behind and includes property, savings and possessions.   

Not every estate will be liable for IHT – as everyone has an inheritance tax allowance – worth £325,000 – known as the ‘nil rate band’ before any potential tax liability kicks in. 

In general terms – anything over this £325,000 limit can be subject to tax – which is charged at a rate of 40%.

However there are tax breaks and concessions that enable you to reduce or wipe out any potential financial burden for your family. 

If you leave everything to your spouse or civil partner - there is no tax payable.  

There’s also another tax break that applies when passing on the family home.  Known as the ‘residence nil rate band’ it enables couples to leave up to £1 million before inheritance tax kicks in.

Gifting or giving away money or possessions can also help save on any potential IHT bill.    There are limits on how much you can give away which include giving away £3,000 in each and every tax year.  If this limit is unused – it can be rolled over for one year making £6,000.

You can also gift money to family members on their wedding – with different amounts depending on your relationship - without incurring any IHT liability.

Sue Hayward

Sue Hayward is a personal finance and consumer journalist, broadcaster and author who regularly chats on TV and Radio on ways to get more power for your pound.  Sue’s written for a wide range of publications including the Guardian, i Paper, Good Housekeeping, Lovemoney and My Weekly. Cats, cheese and travel are Sue’s passions away from her desk!