HMRC has reported record receipts from inheritance tax (IHT) during the period from April 2021 to March 2022 – a total of £6.1 billion, which is a nearly 13% increase on the same period a year earlier.

An ongoing increase in the number of estates that attract IHT, and the total amount of IHT paid to HMRC each year, comes as no surprise. One need only look at the widening gap between the average price of property in the UK (which has rocketed from just under £156,000 in April 2009 to nearly £277,000 in February 2022) and the threshold at which IHT becomes payable (which has remained frozen at £325,000 throughout that same period) to understand why.

Simply put, the average value of estates continues to grow, while the IHT-free allowance (known as the nil rate band) has not changed for more than a decade. Unsurprisingly, more and more estates are becoming chargeable to IHT, a trend which is only set to continue as the nil rate band and residence nil rate band (more on this below) will remain frozen until at least 5 April 2026. The Office for Budget Responsibility estimates that IHT receipts will increase by a further 36% to £8.3bn by 2026/27 and more individuals will be caught by IHT in the coming years.

So what to do?

The most important step that individuals can take is to review their assets, consider the structure of their wills, and take timely advice on appropriate planning. Some of the key options and reliefs that we advise on most frequently include the following:

  • Transferable nil rate band – spouses can ‘inherit’ each other’s unused nil rate band allowance – so if everything is left to the survivor on the first death, it may be possible to claim a total nil rate band allowance of up to £650,000.
  • Residence nil rate band – this was introduced for deaths on or after 6 April 2017, and at the current rate gives each person an extra IHT free allowance of £175,000, provided that certain conditions regarding how their main residence is inherited are met. This allowance can also be ‘inherited’ between spouses. In particular, this only applies in full if your estate is under £2m on death.
  • Downsizing allowance – this allows the residence nil rate band allowance to be claimed in certain circumstances where the person who has died downsized (reducing the value of their property) or moved into a care home before their death.
  • Business property relief – ownership of part of a trading business, or shares in certain unlisted companies, may qualify for 100% relief from IHT, but they must have been owned for at least two years before death.
  • Gifting assets – for those who can afford to, there are various exemptions which apply to making gifts of capital (after which you usually need to survive seven years for it to fall outside a charge to IHT). Importantly, regular gifts of surplus income can immediately fall outside your estate for IHT, so long as certain conditions are met - and detailed records kept. How best to achieve this will depend on individual circumstances.

Even after death, it can be possible to mitigate IHT by entering into a deed of variation (within two years of death), so family members should be aware of this and take early advice during the estate administration process. In many cases, it is possible for estates that far exceed the nil rate band to be entirely free of IHT, by applying the relevant reliefs.

More families are being dragged into the IHT net each year, as the threshold for paying the tax has not been raised from £325,000 since April 2009. If this figure had kept pace with inflation, the threshold would now stand at £500,000