Inheritance tax receipts have surged: do you need to worry about a bill?

Inheritance tax receipts reached £5.7bn between April and December 2023 - an increase of £0.4bn compared to the same period in 2022, according to new figures from HMRC.

By the end of the financial year, it's expected that the total amount collected will eclipse last year's record of £7.1bn. 

Only around 4% of deaths in the UK (27,000 estates) resulted in an inheritance tax (IHT) bill in 2020-21, but frozen thresholds and rising house prices are set to drag more people into the net. By 2028-29 the Office for Budget Responsibility expects some 43,600 estates, or 6.27% of deaths, will be liable.

Here we answer some of the questions we're most commonly asked by readers to help you work out if you need to worry about your heirs being hit with a bill, and what you can do to minimise this. 

1. How does inheritance tax work?

Inheritance tax is levied on a person’s estate after they die and is usually paid out of funds from the estate by the executor(s). It applies to estates that breach certain allowances – any amount above these is usually taxed at 40%.

Your spouse or civil partner will never have to pay tax on assets you leave them as long as you’re both domiciled in the UK. 

Outside of this, everyone has a tax-free inheritance allowance of £325,000 (known as the 'nil-rate band'). There is an additional allowance worth up to £175,000 if you leave your main home to your children or grandchildren.

If you’re married or in a civil partnership, your partner will inherit all your unused allowances. If you leave your estate to your spouse, they can potentially pass on up to £1m tax-free.

However, if you inherit your partner’s allowances and later remarry, you won’t also inherit your new spouse’s allowances if they die before you. They will retain their allowances, plus any they may have inherited from a previous marriage.

The number of estates paying inheritance tax is forecast to rise by a quarter

• Find out more: Inheritance tax: thresholds, rates and who pays

2. What is included in my estate for inheritance tax purposes?

The value of your estate is based on all your assets and possessions. This includes:

• Property, savings and investments
• Items of value, such as jewellery and paintings
• Cars and other vehicles
• Household items, such as furniture and electronic devices
• Foreign assets, such as property or savings abroad
• Life insurance payouts
• Gifts given outside of your 'annual exemption' of £3,000 in the seven years before you died

An important exception is money held in pensions. This can be passed on free of inheritance tax (but if you die after 75, the person inheriting the money will be taxed on this at their usual income tax rate). 

If you’re the executor of an estate, you’ll need to estimate the estate’s value to determine if tax is owed. A rough figure is fine in the first instance, but if any tax is due you’ll need more accurate valuations.

Inheritance tax receipts set to hit almost £10bn by 2029

3. Can any amount be gifted free of tax if the gift giver survives for seven years?

Yes. If you survive for at least seven years after making a gift, there will be no tax to pay. 

Thanks to various gift allowances, you can give some of your money away each year without any tax being due even if you die within seven years. You can find out more in our guide on tax-free gifts.

Outside of these allowances, any gifts could be taxed if you die within seven years of making them (assuming your estate is liable). Tax on these gifts is calculated on a sliding scale based on how long you live after making each gift.

In practice, most gifts don’t become taxable, because the £325,000 inheritance tax allowance is allocated to gifts you made within seven years of your death before it’s used against the rest of your estate.

If you give something away but still benefit from it, it will still count towards the value of your estate - for example if you give away your home but continue to live in it rent-free until your death.

• Find out more: Inheritance tax planning and tax-free gifts

4. Do gifts left to charities reduce the value of my estate for inheritance tax purposes?

They can do. Any money you leave to a charity registered in the UK will be free from inheritance tax. 

What’s more, if you leave more than 10% of your taxable estate to a charity in your will, the rate of tax charged on the remainder will fall from 40% to 36%. 

The 10% only applies to the amount of your estate that exceeds your tax-free allowances.

• Find out more: 7 ways to avoid inheritance tax

5. How do executors work out if gifts have been made?

Executors will be expected to track down details of the deceased’s estate, including information on any gifts they made in the seven years before they died. 

This might include going through bank statements, as well as talking to family members and checking any records they left. 

This job will be much easier if you’ve left clear and complete records and told your executors where to find them.

6. How does using equity release impact inheritance tax?

Equity release allows you to borrow money against the value of your home, which is repaid when you die or move into long-term care. 

Using equity release will therefore reduce the value of your estate. This could, in turn, reduce an inheritance tax bill or take you below the threshold altogether.

But it shouldn’t be seen as a tax-saving strategy. If you’re using the money from equity release to gift money to loved ones, this will be subject to normal gifting rules. In other words, if you die within seven years, the money you give away could become liable for inheritance tax. 

• Find out more: Equity release explained

Is equity release right for you?

Speak to the experts at HUB Financial Solutions, they'll be able to help

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7. Is it worth setting up a trust to minimise inheritance tax?

It’s a common misconception that assets placed in trust are exempt from inheritance tax. 

Most trusts have their own tax rules. For example, you’ll normally pay tax at 20% when setting up a trust if it’s in excess of the nil-rate band. Depending on the type of trust there may also be additional charges and tax.

In certain circumstances, a trust can be worth considering – for example, if you wish to leave an inheritance to minors. 

However, think carefully before going down this route and only deal with firms that are members of a professional body, such as the Society of Trust and Estate Planners (Step) or The Association of Corporate Trustees (Tact).

• Find out more: Inheritance tax and trusts

8. Are inheritance tax rules going to change?

It’s difficult to rule out any changes in the foreseeable future – Chancellor Jeremy Hunt may well come back to the issue ahead of the Spring Budget on 6 March. Already there are rumours that the headline rate will be cut, or even that the tax will be scrapped in its entirety.

However, in the absence of a crystal ball, you should continue to plan your finances based on the current system. Remember, one of the simplest ways to reduce or avoid an inheritance tax bill altogether is to give money away during your lifetime.

• Find out more: What changes could Jeremy Hunt announce at the Spring Budget?

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