This March, HMRC reported a staggering 44.4% increase in Inheritance Tax (IHT) receipts to £5.4bn, compared with the previous month.

While the government was unable to explain why, the revelation comes as HMRC reported a 3.1% increase in IHT receipts during the 2018-19 tax year. This represents a new high in terms of annual revenue for the government and as a proportion of GDP.

Looking ahead, Rachael Griffin, a tax and financial planning expert at wealth manager Quilter, expects the government’s IHT tax take to fall, since the so-called ‘residence nil-rate-band’ increased to £150,000 on 6 April.

This provides an additional threshold before IHT becomes due on estates, which should reduce liabilities. IHT is currently paid at a rate of 40% on estates that are worth more than £325,000.

“Taking money from a grieving family who are burdened with the loss of a loved one and sorting their affairs, sounds like something a villain from a Dickensian novel would do. Unfortunately, it’s a very real activity in the modern day and one that is reaping more and more revenue for the government,” explained Griffin.

Potential benefits of advice

Wealth manager Charles Stanley notes that families may be paying an avoidable tax bill of more than £80,000 because they put off having difficult financial conversations with their children and do not seek financial advice.

The firm believes that advance planning could save up to 40% on death duties. For example, taxpayers paid a total of £5.2bn in IHT in 2017-18 – and up to 40% of this figure (equating to £2bn) could have been saved with the right advice to navigate the IHT rules. This amounts to £81,600 if an estate is eligible for IHT.

John Porteous, a chartered financial planner at Charles Stanley, explained: “With the proper planning the impact of inheritance tax can be minimised by taking advantage of legitimate exemptions, although many of these can be complex which is why they are often missed. Importantly, the longer you leave it, the fewer options you have.”

Research carried out for Charles Stanley by Censuswide, based on a survey of more than 2,000 parents of children aged 18 and over, found that children largely assumed their parents had made inheritance provisions, with only 19% suspecting their parents did not have a will. However, in reality 44% of parents did not have a will in place.

The research also found that parents may be creating family tensions by unequally passing on gifts to their children, which are not offset against future inheritances.

The study found that 59% of young people had received a financial gift from their parents but 82% were not informed that these will be offset against their inheritance. In addition, only 5% of parents had offset gifts against any inheritance.

Five ways to lower your IHT bill

For those who are trying to make sense of the IHT rules, Tony Mudd, divisional director for development & technical consultancy at St James’s Place, outlines five tips to navigate the rules:

1. Use the allowance for individuals to give gifts worth up to £3,000 a year without incurring any IHT.
2. Individuals can pass on larger amounts of money free of IHT, so long as they live for seven years after making the gift.
3. Take account of the ‘normal expenditure out of income’ rule – if you give gifts out of your income and, in doing so, don’t damage your standard of living, they are exempt from IHT, and there is no upper limit.
4. Spread your giving over a number of years, rather than paying out a lump sum.
5. Don’t give away too much too soon – otherwise you could be dependent on your children.