Why are more people paying Inheritance Tax?

 In Inheritance & Estate Planning

If Inheritance Tax really is a “voluntary tax”, why are more people paying it, and what can you do about it?

Data recently published by HMRC shows that in June the Treasury collected £795 million of inheritance tax, making it the highest monthly total on record and industry experts have predicted a record-breaking year for inheritance tax receipts.

Given the various ways in which inheritance tax can be mitigated, it has been called a “voluntary tax” however people are increasingly being caught by increasing property values and the freezing of allowances.

How is Inheritance Tax calculated?

Inheritance tax is a 40 percent tax that applies to any total inherited assets above the value of £325,000 from a single person, or £650,000 from a couple.

There is an additional allowance (called the residential nil rate band) of £175,000 for a single person and £350,000 for a couple for an inherited property that was the primary residence of the deceased and has been passed on to the deceased’s direct descendants (essentially their children).

What can you do about it?

The inheritance tax planning challenge is to understand how much money you need to make sure you can maintain your freedom and financial security for the rest of your life, and how much is a surplus that you would be comfortable giving away to minimise inheritance tax on your death.

The effective use of trusts and gifting and the right retirement income strategy can all help minimise your inheritance tax liability but don’t forget that you are likely to lose at least some control over the assets you are seeking to exclude from any calculation.


The most effective way of reducing the value of your estate is by gifting which for inheritance tax purposes refers to any asset that you give away which has a value be it money, property or personal possessions such as antiques, jewellery or works of art.

There are a number of gifting allowances, the most important being the annual exemption of £3,000 per person. You can also make regular gifts from income as long as this does not significantly reduce your lifestyle.

You can’t gift something and deem it removed from your estate if you then still “enjoy” it without a financial cost i.e., you can’t gift a holiday home but still go there as and when you please or continue to live in residential property, without paying full market rent.

Any gift is 100% exempt from inheritance tax if the donor is still alive 7 years after the gift has been made (the liability starts to be tapered down after 3 years).


There are several types of trust but the simple premise is that they enable the donor to control who the beneficiaries are, what they will get and when. There can be tax implications for trusts and they can be complex to set up, but they are a logical option for many people who want to keep their inheritance tax liability to a minimum.

Pension Funds

Under the current rules, pension funds can be an effective inheritance tax planning vehicle as they are counted outside of the estate for inheritance tax calculations if the death of the pension holder occurs before age 75, otherwise withdrawals from the fund are taxed at the recipient’s marginal rate of tax. Use of this strategy requires the assumption that tax legislation will not be altered in the future.

If you have any questions about how inheritance tax could affect you or your family and what you could do about it, then please get in touch, we are always here to help.

Inheritance Tax Planning, Will Writing, Trusts and Taxation are not regulated by the Financial Conduct Authority.

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