Wealth managers react to latest figures from HM Revenue and Customs, showing another rise on the previous year’s levels, with the IHT threshold being frozen until 2028, and suggest ways of mitigating IHT liability. The topic gains an added edge ahead of the 4 July UK polls.

Latest figures from HM Revenue and Customs released on Friday, show that inheritance tax receipts hit ÂŁ1.4 billion ($1.77 billion) in the first two months of the 2024/25 tax year. This is ÂŁ200 million higher than the same period in the previous tax year, according to Wealth Club, a UK investment service for high net worth and sophisticated clients; it continues the upward trend seen over the last two decades.

In the 2023/24 tax year, the inheritance tax raised ÂŁ7.499 billion in revenue for HMRC. The government’s inheritance tax take is increasing largely due to years of house price rises, high inflation, and tax freezes which have pushed an increasing number of families, who would not see themselves as wealthy, above the threshold for inheritance tax.

Inheritance tax is charged at 40 per cent above a threshold on the estate of a deceased person, currently set at ÂŁ325,000. About 4 per cent of families must pay it, as most estates have fallen under the nil rate band, as the threshold is called. If the deceased was married or in a civil partnership, assets they leave to a spouse or civil partner aren't subject to IHT, regardless of the value of the deceased's estate. (This also explains why laws around marriage and civil partnerships are crucial for IHT purposes.)

Inheritance tax has featured in manifestos and campaigns in the UK election. The Labour party has pledged to restrict the resident non-domicile (non-doms) regime from shifting money offshore, which Wealth Club estimates will raise ÂŁ430 million a year, equivalent to a 6 per cent increase in the overall inheritance tax take. There are also concerns that Labour may go further with the inheritance tax side, such as making it more difficult to gift money and assets, like farmland, tax free. Currently, no inheritance tax is due on gifts if they are made by a person who lives for more than seven years after the gifts were made. Individuals can also claim up to 100 per cent relief on the inheritance of agricultural land if it is being actively farmed. Another possiblity that has been cited by analysts would be to scrap business relief, which enables an individual to pass on a company or shares if it is unlisted with 100 per cent tax relief.

The Reform party – a populist centre-right organisation – has meanwhile pledged to abolish inheritance tax for all estates under ÂŁ2 million, which Wealth Club estimates would leave 2 per cent of estates liable for inheritance tax. The rate above ÂŁ2 million would be 20 per cent, with the option to donate to charity instead.

The Conservative Party also plans to scrap the non-dom regime, which plays 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. The party has also pledged to retain inheritance tax reliefs for family farms to ensure that they can be passed down without tax burdens. From time to time there has been media speculation that the Conservatives might lift the IHT threshold – or "nil rate" band – or get rid of IHT altogether.

IHT, dating back over a century to when taxes on rich estates were called "death duties," has been defended by some as a weapon against persistent inequalities of wealth. Opponents say those amassing that wealth have already paid tax on the income, transactions and gains they undertook to get there. Many wealth creators build assets precisely to give their children support, not to just give a lump to the government and to appease unjust feelings of envy. A complicating factor is that central bank money printing – aka quantitative easing – inflated asset prices significantly, disproportionately benefiting wealthier people, while younger, less affluent citizens have struggled to buy a home. These issues ripple through UK politics.

Nicholas Hyett, investment manager at Wealth Club  
“Inheritance tax is a hot topic this election. Labour are targeting non-doms who shelter their money abroad and the Conservatives have accused Labour of harbouring secret plans to go further – with inheritance tax notably absent from the list of taxes in the Labour manifesto that will not be increased. Meanwhile Reform have promised generous inheritance tax cuts as it tries to win over voters.

“The reality is that inheritance tax would likely rise under either of the two main parties. Freezes on thresholds over the last few years, partnered with decades of house price rises have brought more and more estates into the tax band. Attempts to increase taxes on wealthy non-doms may be politically popular, but most of the tab will still be picked up by families who would not consider themselves particularly rich. For these families, their standard of living hasn’t changed, indeed inflation means it might have gone backwards, but frozen allowances mean that the government now considers them wealthy enough to face inheritance tax.

“As things stand there are some useful ways to mitigate inheritance tax – whether that’s making gifts in your lifetime, passing pensions on tax free, investing in certain qualifying Alternative Investment Market (AIM) shares or making Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) qualifying investments. However political uncertainty is right now – and with inheritance tax a bit of a political football – it’s difficult for investors to make informed decisions. As ever, uncertainty is the enemy of investment, ultimately undermining economic growth.”

Nick Mendoza, partner in the private client team at law firm Wedlake Bell
"Inheritance tax receipts for the two months to the end of May 2024 were ÂŁ1.4 billion – a 17 per cent increase on the same period last year. This is due to a mixture of inflation, rises in asset values, and the fiscal drag resulting from IHT thresholds remaining frozen. Whilst less than 10 per cent of estates reportedly pay inheritance tax, these latest tax figures suggest that more and more families are being brought into the inheritance tax net, particularly those who may have bought homes many years ago and who have seen the value of their homes rise dramatically over time.

"We would advise anybody worried about their inheritance tax liability to seek legal advice and to be careful about rushing into giving assets away or an any other form of inheritance tax planning – the inheritance tax law around gifts, for example, can be complex, particularly in relation to the family home and getting it wrong can trigger unintended tax consequences. Having said that, the Labour manifesto did not make the same pledge as the Conservatives about retaining the current inheritance tax reliefs for business and agricultural assets. Those with valuable assets in those classes may want to keep a close eye on the election result and how this may affect their inheritance tax liability and consider potential planning options."

Alastair Black, head of savings policy at abrdn 
“A frozen IHT nil rate band, combined with rising asset values, continues to draw more people into the IHT net. Comment on plans for IHT have been conspicuously absent from manifestos. What was originally a tax targeted at the super rich has become mainstream.  Much like the other taxes, consumers need a degree of certainty and this needs to be addressed. And, while we’re at it, it’s imperative we look at simplifying the regime too. We’re in the midst of the Great Wealth Transfer, where as much as ÂŁ5.5 trillion in assets are set to be passed between generations between now and 2050. A regime which encourages and facilitates this surely has to be good for UK growth. In the meantime, it remains critical that people are taking the time to consider how they want to pass on their wealth in the most effective and efficient manner – advisors have a real opportunity to once again show their value here. This might include gifting, or funding a pension.”  

Nick Henshaw, head of intermediary distribution at Wesleyan
“Yet another rise in IHT receipts only makes it more shocking that neither of the two main political parties have mentioned it in their manifestos. The simple fact is that IHT is no longer just a tax for the super-wealthy, as it was designed. We urge whoever takes power to revisit it and ensure that it is fit for purpose today, as well as streamlining it to make sure that it is as easy as possible for families to engage with.”