Rising house prices and frozen tax bands mean the taxman is on course to rake in a record amount of inheritance tax this year.

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Inheritance tax (IHT) receipts for April 2023 to December 2023 reached £5.7 billion according to latest HMRC data, which is £0.4 billion higher than the same period last year.

Laura Hayward, tax partner at professional services and wealth management firm Evelyn Partners, said: “IHT is harvesting more in revenue than was ever forecast as rising house prices and growth in investment assets have boosted the value of estates over the last couple of decades.

“This has drawn more estates, and more assets in each liable estate, over the threshold at which IHT kicks in, which has been frozen at £325,000 since April 2009. Modest property downturns as we have seen in the last year or so will do little to dent this trend. In recent years there has also been a Covid effect on mortality which has further increased the overall IHT take.”

Inheritance tax is payable at a rate of 40% on the value of your estate which exceeds the current IHT £325,000 threshold, or £650,000 if you are married, as transfers between married couples and civil partners aren’t subject to IHT. There’s also an additional £175,000 ‘main residence nil rate band allowance’ can be used against the value of your home if you are passing it on to direct descendants such as your children or grandchildren.

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Free guide to saving Inheritance Tax

If your estate is liable for IHT, any tax owed is normally payable six months after you’ve died. If it is not paid by this point, interest will start to be charged. For example, if a person dies in February, any Inheritance Tax that is owed must be paid by 31 August. The interest rate charged on overdue Inheritance Tax is 6%.

The good news is that there are several things you may be able to do to help reduce any potential IHT liability, starting with making sure you have an up to date will and making the most of annual allowances and reliefs.

For example, you can make as many gifts of £250 to as many individuals as you like every year. You also have £3,000 ‘gift allowance’ a year, known as your annual exemption, which means you can give away assets or cash up to this amount in a tax year without it being added to the value of your estate for Inheritance Tax purposes.

However, according to calculations by Evelyn Partners, if the £250 gift allowance, which was set in 1981, had risen with inflation, it would currently be worth around £910, while the £3,000 annual total gifting exemption would now be about £10,920.

It’s also worth noting that gifts of any size may be free of Inheritance Tax as long as you live for at least seven years after making them. If you do, these gifts become known as ‘potentially exempt transfers’ and aren’t included in your estate.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Whether the Chancellor has inheritance tax in his sights at the Budget or not, it is important for those who think they may have a liability in the future to take full advantage of the current gifting structures in place to mitigate it where possible.

“Making gifts to family members – for instance using the £3,000 annual exemption, or gifts made out of surplus income - can do much to reduce your potential liability while also helping your family members build their financial resilience. However, you must take care to document your gifting carefully so there is a full record of what you have done.”

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If you’re worried about the complexity of IHT rules and leaving loved ones with the strain of working out exactly how much is owed, seek professional advice on ways you might be able to potentially reduce or provide for your IHT liability.

Free guide to saving Inheritance Tax

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