The Treasury reported a historic £936 million in Inheritance Tax (IHT) receipts for September – an increase of £265 million on the same month last year.
The last record was set in June with a staggering £871 million, with September reflecting the firm upward trend in IHT receipts, impacting a growing proportion of families.
While a family home, pension and a modest amount of savings may not have created a liability a generation ago, you may no longer have to be ‘super wealthy’ to be exposed.
Why have Inheritance Tax receipts increased?
The mechanism behind the record IHT receipts is known as ‘fiscal drag.’
While the rate of IHT remains at 40 per cent, taxpayers become liable for more tax because thresholds have not risen in proportion with inflation.
In fact, the standard nil-rate band of £325,000 and the residence nil-rate band of £175,000 have been frozen and are not due to increase until 2031.
Frozen thresholds mean the rising value of houses, investments and other assets is more likely to pull estates into the IHT net.
As a result, IHT revenue has been steadily climbing for several years and will likely follow the same trajectory over the coming years.
An estate may have been worth £300,000 15 years ago, but the same assets could now exceed £500,000 due to property inflation and investment growth. This would create an IHT liability.
Families may associate IHT with the highly affluent fringes of society, but they may themselves be exposed.
Consequently, it is important to regularly review estate plans with a financial professional to evaluate the potential IHT liability for beneficiaries.
The addition of unspent pensions
From 6 April 2027, unspent pension funds and death benefits are set to be included in the value of a taxable estate.
If the rising value of assets is sufficient to tip families over the nil-rate band, the addition of pension funds to an estate is likely to have a substantial impact.
For married couples living in the UK, the first death of a spouse still allows estates to be transferred to their partner without IHT to pay.
The individual nil-rate allowance is also transferred, meaning that an IHT-free allowance of up to £650,000 is available to the surviving spouse.
Where qualifying residence is passed on, additional nil-rate bands may push IHT allowances up to as much as £1 million.
While unspent pensions can also be passed to a spouse without tax, the leftover funds from a second death might then be subject to the 40 per cent rate.
If both partners have a large share of their pension left over, the addition of these assets to their estate might comfortably push it above the IHT threshold.
The combination of both fiscal drag and the addition of unspent pension funds to an estate is likely to lead to more families paying IHT.
Speak to an accountant
It is common for families to underestimate the value of their assets, assuming there will be no IHT charged, but this is not always the case.
Our accountants can audit the value of your estate, including property, investments, pensions and other assets, to calculate your potential IHT liability.
Where old advice might have promoted saving pensions and spending other assets to minimise IHT, we can advise on new strategies that factor in the addition of pensions to estates.
To minimise the IHT bill facing beneficiaries, speaking to a professional at an early stage can allow you to benefit from the estate planning opportunities available.
Unsure whether your estate may be exposed to Inheritance Tax? Speak to our accountants for expert tax planning advice.
