Wealth managers react to the the latest figures from HM Revenue and Customs (HMRC) and suggest ways of mitigating IHT liability. So far, there appears to be steady trend of rising revenue from the tax. Debate has also been sharpened by the UK government's plans to axe the non-dom system, and opposition proposals to extend the impact of the change.

Figures from HM Revenue and Customs (HMRC) show that inheritance tax receipts increased to £7.5 billion ($9.3 billion) from March 2023 to April 2024, the highest value ever recorded. The rise in receipts adds fuel to debate on whether the system is becoming politically more painful by affecting a wider spread of the population.

The receipts figure represents a £400 million increase from the same period in the previous tax year, continuing an upward trend over the last two decades. Wealth Club, a UK investment service for high net worth and sophisticated clients, said it estimates that inheritance tax receipts could top £9.5 billion before the end of the decade.

While only 4 per cent of estates are liable to pay IHT, the proportion of deaths resulting in inheritance tax is estimated to grow to over 7 per cent by 2032/33. The number of people affected by inheritance tax will be still greater. By 2032/33, it is predicted that one in eight people will have inheritance tax due either on their death or their spouse or civil partner’s death, Wealth Club said.

For those who are picking up the IHT, Wealth Club calculations suggest that the average bill could increase to £243,000 in the 2023/24 tax year, with over 31,000 families having to hand over part of their inheritance to the taxman. This is a 13 per cent increase from the £214,000 average paid three years ago and a 15.9 per cent rise in the number of estates paying the tax. 

Despite pressure to reduce or even cut the controversial inheritance tax (IHT), it was not included in the spring budget of the current Conservative-led government in the UK. Inheritance tax is typically paid at a rate of 40 per cent over certain thresholds; money can be passed on IHT-free to a spouse or civil partner, who will then also inherit the allowance when they die.

The UK's plans to scrap the resident non-domicile ("non-dom") regime play into the IHT debate. Proposed changes involve transition arrangements in place for current non-doms. The system will be replaced by a new temporary residence scheme. From 25 April, new arrivals to the UK will not have to pay tax on foreign income and gains for the first four years of their UK residency. After that, they will pay the same tax as other UK individuals. A key area of uncertainty over the next couple of years will be what the Labour party, if it comes into power later this year, might do to the IHT arrangements of non-doms when the non-dom system falls out of use after April 2025. There is a lot of concern, and some non-doms might leave early, potentially reducing the likely tax grab in IHT.

Here are some reactions from wealth managers to the hike.

Alastair Black, head of savings policy at abrdn
“This month marks 15 years since the IHT nil rate band was last increased. This freeze, combined with rising asset values, means that the tax is affecting more and more people than it was ever intended to capture. This needs to be fixed if IHT is to go back to its original purpose. But as well as addressing the tax’s scope, we should also take the opportunity to simplify it.

“One way to achieve this would be to remove the residence nil rate band and increase the standard nil rate band. This would create a more streamlined regime, and encourage more people to engage with estate planning – helping wealth move more freely between the generations, which in turn could bring significant benefits to the economy and those under financial pressure amid the ongoing cost-of-living crisis. It would also no longer penalise those without children, and who aren’t marred or are in a civil partnership, creating a more equal tax system.”

John Glencross, CEO and co-founder of Calculus
“IHT revenues continue to steadily rise due to the prolonged freeze on IHT thresholds until at least April 2028. March’s spring budget did not address IHT, therefore it is a financial planning issue that will not go away soon. One effective method to mitigate IHT for advisors and investors is through an Enterprise Investment Scheme (EIS) fund. The EIS offers inheritance tax relief, contingent upon holding shares for at least two years and at the time of death. At Calculus our EIS not only offers investors opportunities for a diversified and tax-efficient portfolio but also enables them to support innovative UK companies with a strong societal purpose and impact."

Wealth Club and other firms set out a variety of commentaries and potential ways to mitigate IHT's impact.

Nicholas Hyett, investment manager at Wealth Club
“It may only be paid by a small minority of taxpayers, but for those picking up the death tax tab, the bills are eye watering. And it’s not just the wealthiest families that are being dragged over the threshold for inheritance tax. Increasing house prices, coupled with threshold freezes, mean that more families are getting caught out by this most hated of taxes despite their quality of living remaining unchanged.

“In the last six months the government has faced increasing calls to abolish the tax altogether, or at least to introduce radical reforms. Evidence from countries such as Sweden and Australia suggests that reform could have positives aside from endearing politicians to voters. Abolishing inheritance tax has been linked with a decline in the number of businesses relocating overseas, and an increase in the number of wealthy individuals choosing to move to the country.

“In the meantime, the good news is that there are still lots of legitimate ways for individuals in the UK to pass on money free of inheritance tax.”

Wealth Club believes that those concerned about inheritance tax should consider:

Giving money away early. Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax free on day one – as are certain smaller gifts. Timing is key as you can give unlimited amounts away but typically these take seven years to be completely inheritance tax free. Of course, once you give away the money you’ve lost control. If you need it back for an emergency, that’s not an option.

Investing in companies that qualify for business relief. These are typically inheritance tax-free after two years. Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control.

Investing in an AIM ISA. Independent Financial Savings Accounts (ISAs) are not inheritance tax free. When you pass away, your loved ones could miss out on 40 per cent of your hard-earned cash. AIM ISAs are a popular way around this. They are riskier but after two years they could be IHT free.

Keeps on rising
The trend appears to be one of remorseless increases in the IHT revenue collection process.

"Another month, another rise in inheritance tax revenue. This is a trend that we can expect to see rise as long as current thresholds remain frozen and asset values continue to rise,” Richard Bate, head of private wealth at national law firm Weightmans, said.

“The good news is that IHT is something that can be planned for and mitigated. And it should be something that’s thought about and considered along with other important points about what happens after you die, like creating a will. By thinking ahead, and using arrangements such as trusts, gifting assets and funding your pension, assets can all be passed on to loved ones in the most tax-efficient way,” he added.

“Anything to do with IHT and exemptions can be complex, and there will be legal considerations to navigate. Getting advice from a financial advisor or a solicitor to help determine the best option for your circumstances can help make the planning process as easy as possible,” he continued.

“It’s certainly true that ever more families can expect to be caught in the inheritance tax net as the value of their estates continues to grow and the £325,000 threshold remains frozen,” Nick Henshaw, head of intermediary distribution at Wesleyan, said.

“Today’s data will be sharpening some clients’ minds to the threat they may face, and it’s an opportunity for advisors to once again show their value in helping them manage and mitigate IHT risk – whether that’s through avenues like trusts, or pension funding,” he added.