Inheritance tax (IHT) bills have soared to their highest-ever level, with HMRC collecting £5.1bn in the past 12 months, according to its latest receipts.
This is the first time that inheritance tax bills have broken through the £5bn barrier within a single year.
As the chart shows, compared to the previous 12 months, HMRC has collected 19.1% more inheritance tax from people’s estates.
Why is inheritance tax rising?
There are several contributing factors. Mainly, the IHT allowance has been frozen at £325,000 for several years now, while property prices, as well as the value of other assets have surged since the 2008 financial crisis.
The new main residence nil-rate band arrived in April 2017, allowing people an extra £100,000 inheritance tax allowance – if they’re leaving property to a descendant.
This should lead to lower inheritance tax bills for many – though estates paying IHT in May would most likely have not felt the benefit.
How can I cut my inheritance tax bill?
There are plenty ways to for your heirs to legally and legitimately pay less IHT. The most common is by giving away your assets, so they don’t form part of your estate when you die.
The following gifts will always be free from inheritance tax:
- £3,000 allowance: you can make one gift per tax-year worth up to £3,000.
- Small gifts allowance: Any gifts of up to £250 each year will also be free from IHT – providing the beneficiary didn’t benefit from your £3,000 allowance
- Wedding gifts: you can give up to £5,000 to each of your children, £2,500 to grandchildren and £1,000 to anyone else as a wedding gift
- Gifts to cover living costs: IHT isn’t due on money to support a child under 18 or in full-time education, an ex-spouse or elderly dependant.
- Gifts to charity: these are always free from IHT
- Gifts from surplus income: you’re allowed to give away disposable income and not worry about a future IHT bill, but the rules are complex.
Other gifts, known as potentially exempt transfers, will be free from IHT, providing you live for at least seven years after making them. If not, the person you gave the money to may need to pay IHT on the gift when you die.
Find out more in our expert guide to tax-free gifts.
Which other taxes are rising?
Despite IHT bills hitting new heights, they weren’t the fastest rising tax.
Insurance premium tax (IPT) rose faster than any other, with HMRC collecting 31.5% more in the last 12 months than the year before, largely because the government has hiked taxes on insurance premiums three times in the past two years. In the year to May 2017, the government collected £4.8bn through this tax.
Stamp duty charged on shares has also surged, due to strong investment markets. As an investor, you’ll pay a 0.5% tax when buying shares. In the last year, investors collectively paid £3.8bn – some 28% more than the year before.
Capital gains taxes also rose sharply – rising 23% to £8.7 billion. Capital gains tax is levied on the profit people make when selling second properties, shares or other assets, but you’re allowed to make £11,300 profit before any tax is due.
On most assets, you’ll pay 10% as a basic-rate taxpayer, or 20% as a higher- or additional-rate taxpayer. Remember that’s not the case with property, where rates remain 18% and 28% respectively.
- Use the Which? Tax calculator to work out your tax bill and submit to HMRC directly.