HMRC raised £2.9 billion in inheritance tax receipts between April and the end of August 2022, according to new figures released today. This is a £300 million increase from the same period the year before.

Under UK law, inheritance tax is paid at 40% on assets valued above a certain threshold. Currently around one in every 25 estates pay the tax, and a combination of inflation and decades of house price increases are taking more and more estates above the threshold.

Wealth Club calculations suggest the average bill could increase to just over £266,000 this tax year. This would be a 23% increase from the £216,000 average paid just two years ago.

Alex Davies, CEO and Founder of Wealth Club said: “The Treasury raked in £2.9 billion from inheritance tax from April to August this year, which is £300 million more than over same three months a year earlier. This is being fuelled by soaring house prices and years of frozen allowances, made worse by recent double digit inflation.

The new PM has stated that she would review inheritance tax rules if she came into power. But it’s hard to imagine IHT is top of the to-do list for Friday’s Mini budget, especially with so many more pressing issues at hand. The tax is a vital cash cow for the Treasury, and the extra £300 million collected in the last four months is certainly needed.

Nonetheless, there are a few reforms the government might consider. Scrapping the tax altogether seems unlikely, but cutting the 40% rate or increasing the threshold which has been frozen since 2010 at £325,000 would all be welcome changes.

The good news however is that there are already several perfectly legitimate and sensible ways to reduce the amount of inheritance tax your family might have to pay on your death. 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 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.

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.
IHT receipts received by HMRC during the financial year 2021 to 2022 were £6.1 billion.
The largest exemption set against assets continues to be for transfers between spouses and civil partners, valued at £13.0 billion in the 2019 to 2020 tax year and used by 21,500 estates.
The average liability increased in the tax year 2019 to 2020 by £7,000 (3%) to £216,000. The average tax bill in London was a little over £300,000.
In general, female-owned estates tend to have slightly higher tax charges than those owned by males. This is likely due to the fact that females tend to have a higher life expectancy at birth than males.
By region, London and the South East of England have the highest numbers of estates passing on death which resulted in an IHT charge, at 4,190 and 4,990 estates respectively.
London and the South East account for £1.3 billion and £1.1 billion of the total tax liability. This represented 55% of the IHT liability for England, and 47% of the IHT liability across the whole UK.

*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.