After the UK government’s tax authority released its inheritance tax receipts for the period April to November 2023 – showing another rise on the previous year’s levels, and with the IHT threshold being frozen until 2028 – wealth managers look at what can be done to mitigate IHT liability.

Latest figures from the UK’s tax authority HMRC show that inheritance tax receipts hit £5.2 billion ($6.6 billion) from April to November 2023, up £400 million from the same period last year, continuing the upward trend over the last decade.

These figures show how much the government’s inheritance tax take seems to be rising, due largely to years of house price increases, soaring inflation, and tax freezes which have pushed an increasing number of families, who would not consider themselves to be wealthy, above the threshold for inheritance tax.

Inheritance tax is typically paid at a rate of 40 per cent over certain thresholds; money can be passed on IHT-free to a spouse or civil partner, who will then also inherit the allowance when they pass away.

The main threshold – the nil-rate band – 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. 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. However, this tapers for estates worth over £2 million and is unavailable for estates worth over £2.35 million. 

Despite pressure to cut or even remove the controversial inheritance tax in this year’s Autumn Statement, it was not included in the package, although some believe it could just be a delaying tactic until the March budget, ahead of the UK general elections in 2024. See more here.

PAYE income tax and National Insurance receipts from April to November 2023 also climbed reaching £263.5 billion, according to the HMRC’s figures.

“This significant growth shows just how much of an impact the Chancellor’s frozen thresholds continue to have. However, the 2 per cent cut to National Insurance from 12 per cent to 10 per cent for the main rate of Class 1 employee NICs announced at the recent autumn statement will bring a welcome increase in take home pay for workers in the new year,” Shaun Moore, tax and financial planning expert at Quilter, said. 

“Inheritance tax receipts, on the other hand, are expected to continue rising and we will likely see them beat the previous £7.1 billion record before the end of the tax year. IHT is a highly emotive tax that can split voters, so we can expect it to continue being a battleground policy for both the Conservatives and Labour as we near the general election. Though Jeremy Hunt opted not to make changes during his latest statement, we are expecting a budget to take place in March during which it could resurface if the Tories view it as a vote winner. Either way, some form of simplification of the tax is overdue,” he continued. 

“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,” Nicholas Hyett, investment manager at Wealth Club, added. 

With IHT being one of the most important taxes that a high net worth individual is likely to contend with, Wealth Club looks at what can be done to mitigate IHT liability:

1) 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.

2) 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.

3) Investing in an AIM individual savings account (ISA). ISAs are not inheritance tax free. When you pass away, your loved ones could miss out on 40 per cent 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.”