The government pulled in £4.4bn from inheritance tax (IHT) in the past six months as more families were “quietly” pulled into the net, data from the Treasury shows.
The amount raised between April and September this year is up 2.3 per cent and is due to be a record for the government.
The boost to the Treasury coffers is in part due to frozen thresholds which have remained in place for years, meaning more and more people are being dragged into the bracket where tax is required to be paid.
Any estate – the total asset ownership of a person who dies – worth more than £325,000 is subject to tax above that limit. There are exemptions, such as passing a main home to children or grandchildren – called the residence nil-rate band or RNRB – which gives an extra £175,000.
But the threshold has been frozen since 2009 and – with assets such as property, investments or even cash all growing in value -more people who would previously not have accumulated total estate wealth beyond that value are now doing so.
The upshot is that more tax is due upon death, with the standard IHT rate set at 40 per cent for values above thresholds.
The process is known as fiscal drag – similar to many workers being pulled into higher income tax brackets as wages rise but band thresholds stay frozen.
Ian Dyall, head of estate planning at wealth managemers Evelyn Partners, pointed out it was likely to be another highest-ever year of income for HMRC by way of IHT.
“The Treasury is on course for another record-breaking year of revenues from inheritance tax (IHT). Fiscal drag is quietly pulling thousands more families into the IHT net as asset values increase year-by-year,” he said.
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Mr Dyall added that the upcoming Budget might see Rachel Reeves make further changes which affect IHT, such as reducing peoples’ ability to gift cash prior to death without as much tax being payable.
“Possibilities include a crackdown on gifting, which could take the form of a lifetime gifting cap replacing the current unlimited gifting rule under the seven-year exemption, or extending the seven-year rule out to ten or more years,” he explained.
“The combination of unspent pension assets becoming subject to IHT, fears over possible restrictions to pension tax-free cash, and speculation that gifting rules could be tightened up, has caused some families to hastily withdraw pension cash and start giving it away.”
Most experts recommend not withdrawing pension lump sums in a hurry ahead of the Budget until financial advice has been sought and you are certain of your likely needs for retirement.
Rachael Griffin, tax and financial planning expert at Quilter, said the overall figures from government borrowing showed the Treasury remains reliant on taxing the same people even more.
“Today’s HMRC data offers a revealing snapshot of the public finances and how heavily the government continues to lean on fiscal drag to prop up revenues,” Ms Griffin said.
“The direction of travel suggests this burden could grow further. There is speculation that the government is considering changes to the gifting rules. Combined with the planned inclusion of pensions within IHT from 2027, these measures risk transforming what was once a niche tax affecting a small minority into one that captures an increasingly large share of the population.”
It is estimated that more than £3trillion of assets is owned or held by those aged 55 and over in the UK.
Uncertainty over what exactly will be announced in the Budget has created a rush of questions to financial planners, over pensions but also businesses, home-buying and more potential long-term wealth transfer issues.
The housing market has not experienced its usual autumn surge this year, with some experts suggesting that is also due to Budget uncertainty, leaving buyers in wait-and-see mode before spending.
Stephen Lowe, director at retirement specialists Just Group, added: “The Treasury now looks set to collect a fifth consecutive record annual haul. With further reforms that were announced at last Autumn’s Budget yet to be implemented, we can expect this trend to continue and grow.
“Anyone who is uncertain or concerned that their estate may be subject to Inheritance Tax should get an up-to-date valuation of their estate, including a recent assessment of their property wealth. Estate planning is complex and difficult – especially with tinkering to the rules – and many families who wish to manage their estate efficiently will benefit from professional financial advice.”
