HMRC took in some £4.3bn in the six months from April to September from inheritance tax (IHT), around £400m more than the same period the previous year, according to figures released on Tuesday.
Around one in 20 estates are currently liable to pay IHT but this could rise from next year as murmurings from Westminster suggest chancellor Rachel Reeves could have the unloved tax in her sights as a way to swell the Treasury’s coffers.
Historically, inheritance tax has been viewed as a tax on the wealthy, but this is no longer the case, according to David Denton, technical consultant at Quilter Cheviot.
“According to the government, the average UK house price now sits at £293,000, rising significantly in certain areas of the country such as London and the South East. This leaves just £32,000 before the full nil rate band is exhausted and someone’s estate becomes exposed,” he said.
“However, given just yesterday Rightmove reported that the average new seller asking price is now £371,958, this could automatically make £46,958 of someone’s home taxable if they are not entitled to use the complex residence nil rate band.”
Nicholas Hyett, investment manager at Wealth Club, said the tax is a “cash cow” for the government and people should expect the chancellor to “attempt to milk more revenue from estates”.
Perhaps the biggest change could be to pensions. At present, retirement savings are exempt from IHT calculations but the chancellor could potentially change that in next week’s Budget. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said such a move would bring pensions “into line with other savings vehicles such as ISAs, though it could prove complex”.
“We could instead see the chancellor opt to introduce a death tax similar to what was in place pre-Freedom and Choice, which could also bring in extra cash,” she added.
This could dissuade people from storing up their pensions to pass on to future generations and instead encourage retirees to spend down their savings.
Hyett said: “Removing the IHT-free status of pensions will be damaging. It is in any government’s interest that people can support themselves in retirement. Constantly changing the rules puts people off saving in a pension, whether they are rich or poor.”
Changes to Business Relief, which includes the IHT exemptions on select AIM shares, are also rumoured to be on the cards.
“Business Relief helps family-owned businesses pass between generations as well as encouraging investors to invest in young, fast-growing businesses – whether that’s on AIM or through start-ups qualifying for EIS [enterprise investment scheme]. Removing the relief would decimate smaller, family-owned businesses, while also making backing smaller companies less attractive,” said Hyett.
Extending the period needed to make gifts inheritance-tax free from seven to 10 years is also believed to be on the table, although Denton said this “could face significant backlash”.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said anyone planning to use the £3,000 annual gift allowance may wish to do so before the Budget, “while you know where you stand”.
“However, there’s a vital balance to strike here, so you’re not giving money away you can’t manage without, purely because you’re worried about tax,” she warned.
Today’s figures also showed PAYE income tax and national insurance raised £211.9bn in the six months from April to September, an increase of £5.7bn.
Denton said: “Labour has long since pledged that it would not increase income tax, national insurance or VAT – all of which could have helped the government shore up significant amounts of money had it opted to make changes.”
However, while Labour may not increase income tax directly, the chancellor is considering freezing thresholds for an additional two years to the 2029/30 tax year.
“Our estimates show a further two-year freeze on income tax thresholds could result in a million more pensioners paying the tax, as well as up to a further 1.5 million more people being dragged into paying the higher and additional rate of tax,” said Denton.
“If wages increased by 3% each year, our calculations show that someone earning £60,000 today could expect to pay an additional £3,579 in income tax between the 2028-29 and 2029-30 tax years compared to if allowances had kept up with earnings.”