£2.4bn inheritance tax rip-off – experts call for IHT reform

The calls came as official statistics revealed the Treasury raked in another £2.4billion in inheritance tax (IHT) receipts in the three months to July. That is £300million higher than the same period last year.

IHT is levied at 40 per cent on the value of an estate – including money, jewellery, savings, investments, property, cars and art – over the nil-rate band of £325,000.

But this threshold has stayed at the same level since April 2011 and meanwhile, soaring property prices mean increasing numbers of people are becoming higher-rate taxpayers when they die.

Married couples can also qualify for a “family home allowance” of £175,000 each. This is added to the £325,000 and when combined, allows them to pass on estates worth up to £1million to their direct descendants.

Introduced in 2017, this “residential nil-rate band” has been frozen until 2026. However, the average cost of property has rocketed by £140,129 from April 2009 to June 2022, pushing more and more sellers above the threshold.

Tax experts have warned it is no longer just millionaires with mansions being hit by inheritance tax. They say many are having to pay up simply because of their property wealth.

Myron Jobson, senior personal finance analyst at money services company Interactive Investor, said: “The bumper tax haul demonstrates that inflation – both wages and house prices – is feeding through into the HMRC coffers. This may leave a sour taste at a time people can’t afford energy bills.”

The Wealth Club investment service suggests the next Prime Minister should cut the 40 per cent rate, increasing the £325,000 threshold or making more assets such as ISAs, exempt.

Its CEO and founder, Alex Davies, said: “The new Prime Minster should consider the wise words of Louis XIV’s finance minister – “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.

“As things stand, the Treasury is plucking just a handful of geese, and those balding birds are hissing rather loudly.”

Shaun Moore, a tax and financial planning expert at wealth management firm Quilter, said a potential slowdown in property prices and supply and demand may keep receipts high.

He said: “No longer is IHT the preserve of the rich. Many estates are having to pay the tax simply because of their property wealth. IHT is proving to be more and more lucrative for the Treasury.”

Meanwhile, Wealth Club estimates the average bill could increase to just over £266,000 in the current tax year – a 27 per cent rise from the average of £209,000 paid just three years ago.

Mr Davies said: “Inheritance tax reform is a potential vote winner for Rishi Sunak and Liz Truss among Conservative Party members, but it’s hard to imagine it will be top of their agenda in any emergency Budget once they step into power.

“Cutting inheritance tax will do nothing to ease the cost-of-living crisis engulfing the country and it’s a real cash cow for the Treasury too. IHT generates around £800million in tax revenue each month – a very meaningful sum at a time when 29 million households are being given £400 each to offset energy bills.

“The increase in the monthly IHT take is being driven by soaring house prices and years of frozen allowances. With rampant inflation, the effect of freezing allowances will only increase in the years ahead unless the new Prime Minister chooses to intervene.”

Mr Davies said even though just four per cent of estates pay inheritance tax at the moment, without some review of the rules “more and more families are going to find themselves hit by death duties they might not have expected”.

Andrew Tully, technical director at assurance company Canada Life, said the frozen thresholds meant HMRC had doubled its IHT tax take over the past 10 years. He added: “This surge will partly be driven by the ongoing increase in house prices, as residential property makes up the largest share of most estates.

“Both the nil-rate band and residence nil-rate band are frozen until at least April 2026, so we can expect to see IHT receipts continue to rise. This is a tax that is no longer just affecting the very wealthy in society and is increasingly catching out families who are unprepared or simply unaware.”