The record for IHT receipts was broken… again: What does this mean for estates?

With a historic £936 million in Inheritance Tax (IHT) receipts collected by the Treasury in September –  an increase of £265 million year-on-year – why are people paying more tax?

This is the second time this year that HMRC has recorded its highest IHT receipts, with a record-breaking £871 million collected in June.

A family home, a modest amount of savings and a pension may not have created a liability some 30 years ago, but this latest data shows that you no longer have to be highly affluent to be impacted by IHT.

Why have Inheritance Tax receipts increased?

Behind the record IHT receipts is a mechanism known as ‘fiscal drag.’ While the rate of IHT remains at 40 per cent, estates may be more exposed to IHT as tax thresholds have not risen in proportion to inflation.

This is because the standard nil-rate band of £325,000 and the residence nil-rate band of £175,000 are frozen until 2031.

Thresholds fixed in place may mean the rising value of houses, investments and other assets pull a larger number of estates into the IHT net.

Consequently, IHT revenue has been steadily rising for several years and will likely follow the same trajectory until the tax thresholds are revised.

An estate may have been valued at £300,000 a few decades ago, but the same assets could now exceed £500,000.

The surplus value added by property inflation and investment growth may create an IHT liability.

In addition, the new £2.5 million Agricultural Property Relief (APR) and Business Property Relief (BPR) threshold introduced this year means that fewer eligible estates will benefit from a full exemption.

Any value above the threshold will be taxed at an effective IHT rate of 20 per cent.

While families may assume that IHT only affects the highly affluent fringes of society, this belief is becoming increasingly outdated.

To audit your IHT exposure, it is important to regularly review your estate plans to understand whether the wealth you leave behind will be taxed.

The addition of pensions into an estate

On 6 April 2027, unspent pension funds and death benefits will be incorporated into the value of a taxable estate.

Unspent pensions can be passed to a spouse tax-free, like the nil-rate bands, but the remaining funds from a second death may then be subject to IHT.

Where both partners have a large proportion of their pension left, the addition of these assets into their taxable estate may lead to a substantial IHT liability for beneficiaries.

Speak to an accountant

Many families underestimate the total value of their estate, assuming IHT will likely not affect them.

Prime Accountants can evaluate the value of your estate, factoring in property, investments, and pensions, to calculate your potential IHT exposure.

Where old advice might have recommended preserving pensions and spending other assets to minimise IHT, we can suggest new strategies that factor in the addition of pensions to estates.

Do you know whether you’re likely to pay Inheritance Tax on your estate? To establish the facts, speak to Prime Accountants for expert tax planning advice.