Inheritance tax payments hit highest ever level: how to reduce your bill

Individuals were hit with a £4.84 billion ‘death tax’ charge in the 2016/17 tax year, the latest official figures from HM Revenue & Customs (HMRC) show.

The amount pocketed by the government in inheritance tax takings (IHT) has reached a record high, increasing 4 per cent compared to the 2015/16 tax year (£4.7 billion).

The rise appears small, but when looking at the bigger picture the number of families being dragged into the inheritance tax net over the past couple of years has increased markedly. In the 2014/15 tax year, for example, IHT receipts stood at just shy of £4 billion, which works out at 21 per cent lower than today, just two years on.

Rising property prices and a static IHT threshold, which has remained at £325,000 since 2009, have been the biggest drivers behind death tax payments rising.

In turn, IHT is no longer reserved solely for the ultra-wealthy – families on modest incomes can also be liable, largely because of the rising value of their homes. To address this issue the government has introduced the so-called residence nil rate band (RNRB).

In a nutshell the RNRB, used together with the existing allowance of £325,000 per person or £650,000 for married couples and civil partners, will enable couples with a home to pass on up to £1 million to their direct family free of inheritance tax. 

- New inheritance tax rules: everything you need to know

The RNRB was introduced in April, but will be phased in gradually over three years. The new allowance starts at £100,000 in the tax year 2017/2018 and rises to £125,000 in 2018/2019, £150,000 in 2019/2020 and £175,000 in 2020/2021. Over the next three years, the rate applicable will be the rate at the date of the person's death.

But, as Danny Cox, a chartered financial planner at Hargreaves Lansdown, points out, the IHT receipts for the 2015/16 tax year are unlikely to show the impact of the new RNRB due to the time lag between estate administration and IHT collected, which is typically six months.

He adds: ‘The exchequer’s coffers continue to benefit from the booming housing market and rising asset values.’


Generally, anyone gifting money must survive for another seven years after making their gift for the sum to completely drop out of their estate. However, some gifts are immediately inheritance tax (IHT) exempt.

• Grandparents can give up to £2,500 to each grandchild who marries without the gift being counted as part of their estate. Parents can gift up to £5,000.

• There is also an 'annual exemption' that lets you gift up to £3,000 each tax year, and you can carry over unused allowance from the previous year, enabling you to gift up to £6,000.

• Regular gifts, for birthdays for example, are also permitted, as is any number of small gifts up to £250, provided you have not already given the recipients 'exempted' gifts in the same tax year.

• Gifts to registered charities and political parties are tax exempt.

• Another way to exempt a gift from IHT is to make the gift out of normal expenditure. Unlimited amounts of surplus income can be gifted during your lifetime, as long as this is not at the expense of your usual standard of living.

Keep a formal record of the IHT-exempt gifts you make, as HMRC may require proof of your intentions.
Tax planning is a complex area, particularly in the case of IHT planning, so it is worth seeking the advice of a reputable independent financial adviser or financial planner.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment