The latest figures from HM Revenue and Customs (HMRC) show that inheritance tax receipts received by HMRC increased by £300 million to £1.8bn in the three months period of April 2022 to June 2022. This is an increase from the same period in the previous year, and continues the upwards trend over the last ten years.

One in every 25 estates pay inheritance tax, but the freeze on inheritance tax thresholds, inflation at its highest level for 40 years and decades of house price increases are bringing more and more estates above the threshold.

For those that are paying this death tax, Wealth Club calculations suggest the average bill could increase to just over £266,000 this tax year. This is a 27% increase from the £209,000 average paid just three years ago.

Inheritance tax is typically paid at a rate of 40% over certain thresholds (noting you can pass on money IHT free to your spouse or civil partner, whose enlarged estate could then be subject to IHT when they die). The main threshold is the nil-rate band and applies to the vast majority of people in the UK, enabling up to £325,000 of an estate to be passed on without having to pay any IHT. There is also a Residence Nil Rate band worth £175,000 which allows most people to pass on a family home more tax efficiently to direct descendants, although this tapers for estates over £2 million and is not available at all for estates over £2.35 million However, the nil-rate band has stayed at the £325,000 level since April 2009. Inflation has risen 45% over this time and average house prices have increased 67%.

Alex Davies, CEO and Founder of Wealth Club said: “The Treasury raked in an extra £300 million from inheritance tax from May to June 2022 compared to the same three months a year earlier, this increase is being fuelled by soaring house prices and years of frozen allowances which are now being decimated further by rampant inflation. Currently just 4% of estates pay inheritance tax, but given the nil-rate and main residence nil-rate bands are frozen until at least April 2026, it is likely the estates of many individuals with more regular incomes and average value homes, will end up getting caught out by this most hated of taxes. Moreover, with the government purse under pressure from all angles there is unlikely to be any respite from this soon.

The good news however is that there are still lots of perfectly legitimate and sensible ways to pass on money free on inheritance tax to your heirs and it is for this reason that inheritance tax in some circles is referred to as a ‘voluntary tax’.”

Make a will
Making a will is the first step you should take. Without it, your estate will be shared according to a set of pre-determined rules. That means the taxman might end up with more than its fair share.

Use your gift allowances
Every year you can give up to £3,000 away tax free. This is known as the annual exemption. If you didn’t use it last year, you can combine it and pass on £6,000. You can also give up to £250 each year to however many people you wish (but only one gift per recipient per year) or make a wedding gift of up to £5,000 to your child; up to £2,500 to your grandchild; up to £2,500 to your spouse or civil partner to be and £1,000 to anyone else.

Make larger gifts
Pass on as much as you like IHT free. So long as you live for at least seven years after giving money away, there will be no IHT to pay.

Leave a legacy – give to charity
If you leave at least 10% of your net estate to a charity or a few other organisations, you may be able to get a discount on the IHT rate – 36% instead of 40% ­– on the rest of your estate.[1]

Use your pension allowance
Pensions are not usually subject to IHT – they can be passed on tax efficiently and, in some cases, even tax free. If you have any pension allowance left, make use of it.

Set up a trust
Trusts have traditionally been a staple of IHT planning. They can mean money falls outside an estate if you live for at least seven years after establishing the trust. The related taxes and laws are complicated – you should seek specialist advice if you’re considering this.

Invest in companies qualifying for Business Property Relief (BPR)
If you own or invest in a business that qualifies for Business Property Relief – the majority of private companies and some AIM-quoted companies do – you can benefit from full IHT relief. You must be a shareholder for at least two years and still be on death though.

Invest in an AIM IHT ISA
ISAs are tax free during your lifetime but when you die, or when your spouse dies if later, they could be subject to 40% IHT. An increasingly popular way of getting around this is by investing your ISA in certain AIM quoted companies which qualify for BPR. You must hold the shares for at least two years and if you still hold them on death you could potentially pass them on without a penny due in inheritance tax.

Back smaller British businesses
The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) offer a generous set of tax reliefs. For instance, SEIS offers up to 50% income tax and capital gains tax reliefs, plus loss relief if the investment doesn’t work out. But EIS and SEIS investments also qualify for BPR, so could be passed on free of IHT.

Invest in commercial forestry
This is an underused option for experienced investors. Pension funds and institutions have long ploughed money into forestry. The Church Commissioners has a forestry portfolio worth £400 million. Commercial forest investments should be free of IHT if held for at least two years and on death.

You should also benefit from capital appreciation in the value of the trees (and the land they are on) and from any income produced by harvesting the trees and selling the timber (this income may also be tax free).

Spend it
One sure-fire way to keep your wealth away from the taxman’s hands is to spend it.

Key IHT stats

In the tax year 2018 to 2019, 3.7% of UK deaths resulted in an Inheritance Tax (IHT) charge.
The average liability increased by 6% (£12,000) in the tax year 2018 to 2019 to £209,000.
London and the South East have the highest numbers of estates resulted in an IHT charge, accounting for 53% of the total IHT charged across England, and 46% of the total IHT charged across the UK. The average taxpaying estate in London paid £271,800.
The lowest IHT paying regions had average IHT charges of £152,900 in the North West of England, £156,000 in Wales and £158,700 in Northern Ireland. This is most likely attributed to lower house prices in those regions.
In the tax year 2018 to 2019, the average taxpaying male-owned estate had a net capital value of £1.2 million and a tax charge of £203,900.
The average taxpaying female-owned estate had a slightly lower net capital value of £1.1 million and a slightly higher tax charge of £212,605. In general, female-owned estates tend to have higher tax charges than those owned by males most likely due to the fact that females tend to have a higher life expectancy than males.
*Based on OBR predictions that IHT will increase in 2022/23 tax year to £6.7bn – https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/– we believe in the 2022/23 tax year the average tax bill could be a little over £266,000.