Wealth managers react to the latest figures from HM Revenue and Customs – showing another rise in inheritance tax, with the threshold being frozen until 2028 – and suggest ways of mitigating IHT liability. There are also concerns that the government will go further on IHT in the October budget.

The latest figures from HM Revenues and Customs released this week show that inheritance tax receipts for April 2024 to July 2024 have risen to £2.8 billion ($3.66 billion), which is £200 million more than the same period last year.

IHT receipts are continuing to grow, driven in large part by frozen nil-rate band thresholds and rising asset prices, continuing the upward trend seen over the last two decades. UK Chancellor of the Exchequer Rachel Reeves has also said that the government will have to increase taxes in the October budget, sparking concerns that she may go further with the inheritance tax side.

More recent IHT data shows that the surge in payments of the tax is gathering pace. Earlier this year, HMRC revealed that the IHT take for 2023/24 had risen 5.6 per cent on the previous year to a record £7.5 billion ($9.6 billion).

Inheritance tax is charged at 40 per cent above a threshold on the estate of a deceased person, currently set at £325,000. About 4 per cent of families must pay it, as most estates have fallen under the nil rate band, as the threshold is called. If the deceased was married or in a civil partnership, assets they leave to a spouse or civil partner are not subject to IHT, regardless of the value of the deceased's estate.

There are also fears that Reeves will go further on the inheritance tax side in the October budget, for example making it more difficult to gift money and assets, such as farmland, tax free. Currently, no inheritance tax is due on gifts if they are made by a person who lives for more than seven years after the gifts were made. Individuals can also claim up to 100 per cent relief on the inheritance of agricultural land if it is being actively farmed. Another possibility that has been cited by analysts would be to scrap business relief, which enables an individual to pass on a company or shares if it is unlisted with 100 per cent tax relief. The alarm was also sounded for a hike in capital gains tax.

Here are some reactions from wealth managers to the news.

Kevin O’Shea, director, wealth planning at RBC Wealth Management
 “This year, inheritance tax turns 130 years old and remains one of the most unpopular taxes in the UK. This is partly due to a general lack of understanding (owing to complex rules) and partly due to the rate of tax (with two fifths of an estate taken in tax and the remaining three fifths shared between the beneficiaries). IHT raises a small proportion of overall taxes each year but, like many other taxes, the amount continues to grow as fiscal drag (the freezing of tax brackets and allowances so more funds fall within its scope) takes effect. The IHT threshold has been frozen at £325,000 for the last 15 years. Were it linked to RPI, it would now stand at £599,181. Over the same period average house prices have increased by 82 per cent.

“Despite death being something we will all face, planning for it and talking about it can be difficult. Like all challenging topics we can more easily process it and create a plan if we take it in steps. Many consider a will to be the first step. However, before writing a will it is useful to set out all your assets and liabilities which will help you to understand what legacy you will have to distribute. Once you have decided how you would like your estate to be allocated, you will need to ensure that you have an up-to-date will (or understood the laws of intestacy should you die without a will) that reflects your wishes.

"The next step is to understand what the current IHT liability would be (in pounds and pence), where the tax would likely be paid from (e.g. what liquid assets can be used), and what the effective rate of IHT is on your wealth. This exercise will create context for any future planning. Before engaging in any IHT planning you should ask yourself 'what rate of IHT do I consider to be fair ?' as this will give you a goal effective rate of tax and enable you to understand the value of different IHT planning strategies available to you. Planning options range from doing nothing, to leaving the UK; they include lifetime gifts (directly to individuals or indirectly through structures), insurance (to pay the tax), tax exempt investments, charitable giving and spending (so there is less to tax to pay).

“Those trying to minimise the tax without a goal in place or a strategy often do so to the detriment of their lifestyle. A more targeted approach can bring peace of mind and balance. Others may hope that the tax will be reduced or abolished before they die. As IHT has now outlived the longest living human (122 years old) this is a risky strategy. Failing to promptly and effectively address the issue of IHT can lead to families facing overwhelming administrative and financial burdens during a time of already profound emotional stress. By adopting a proactive and incremental approach to IHT, the process can be made significantly easier, alleviating the strain on those who are grieving the loss of a loved one.”

Nick Henshaw, head of intermediary distribution at Wesleyan
“As the thresholds remain frozen, we’re seeing growing demand for IHT advice, and an increasingly younger demographic looking for planning support. We are also seeing more people coming to us who have already tried to develop DIY IHT strategies. While some are effective, there are some areas that are being overlooked – such as people buying life policies to cover potential IHT bills, but not buying whole of life policies, which could leave them uncovered if they live beyond the policy’s scope.

“With IHT receipts likely to remain elevated without any change to the regime, advisors will continue to play a critical role in helping families develop robust strategies that will support them, and their loved ones.”

Alastair Black, head of savings policy at abrdn 
“Without any IHT reform, these numbers will only continue to rise. In fact, the OBR has projected that receipts could reach £9.7 billion by the end of the decade. Following Rachel Reeves’ announcement of a £22 billion ‘hole’ in UK finances, speculation is rife about potential tax hikes, with IHT mooted as one possibility. With this in mind, we eagerly anticipate what will be unveiled in the upcoming Budget.

“There’s a chance we could see pensions drawn into the IHT net or existing allowances tightened. However, these changes could have far-reaching consequences. They might deter investment needed to boost economic growth or complicate matters for consumers who have made significant financial decisions based on the current rules, potentially requiring intricate transitional arrangements. Any proposed changes are far from straightforward. If changes are made however, we’d like to see IHT simplified and recalibrated. Rethinking the tax could help return it to fairer foundations, and also prevent IHT becoming a penalty for entrepreneurship.”