How to stop your death being a big earner for HMRC

As it stands right now, unless you have your affairs in order, your death could prove to be a big earner for HMRC. And a financial headache for your loved ones.

While there is the tantalising prospect that the government could scrap inheritance tax (IHT) ahead of the general election, in order to win votes, that is in no way a done deal. IHT is already a big earner for HMRC and previous calls to scrap it have failed, principally because of all the revenue it brings in.

It is a veritable cash-cow for the government. Data from HM Revenue & Customs shows that inheritance tax receipts increased to £5.2bn in the eight months from April to November. And the Office for Budget Responsibility has said it expects the total sum to reach £7.6bn this year. That would be an increase of 7.5% on the money raised from IHT last year.

Overall, the levy is on track to raise nearly £10bn a year by the end of the decade, but the Institute for Fiscal Studies thinks inheritance tax receipts could be closer to £15bn a year in a decade, if nothing changes.

Inheritance tax planning is complex and certainly worth taking advice on. It is currently typically paid at a rate of 40% over certain thresholds. The primary one, the one that gets people talking and is the one everyone has their eye on ahead of the general election, is the nil-rate band.

This is the one that gets most people vexed because of their desire to be able to pass their home, which is generally their most valuable asset, down to the next generation unhindered - and untaxed - when they die.

The nil-rate band enables up to £325,000 of your estate to be passed on without any inheritance tax payable on it. For most people it’s all about their home. And the topic has become all the more emotive due to the fact that the nil-rate band has remained unchanged since 2009, during a period in which house prices have risen substantially.

The IHT rules currently mean a couple, in a marriage or civil partnership, can pass on assets worth a total of £1 million tax-free. That is because they each have a £325,000 allowance that the surviving spouse or civil partner will then also inherit when they pass away. Plus, in addition there is a second band, called the residence nil rate band, that is worth an additional £175,000 each. This enables them to pass down up to £1m of assets to their direct descendants, when they both die, without HMRC getting a penny.

It is larger estates though that bring in the revenue for HMRC. The residence nil rate band worth £175,000 each starts to taper for estates valued at over £2 million. The taper reduces the amount by £1 for every £2 that the net value of the estate is more than £2 million, which means it disappears altogether on estates worth over £2.35 million.

Changes to inheritance tax have been mooted many times. Back in 2019 an independent review proposed a radical shake-up of the existing law around inheritance tax, suggesting that the seven year rule around gift-giving should be cut to five years.

The review, ordered by the then-Chancellor Philip Hammond, and conducted by the Office of Tax Simplification, concluded that the current seven-year rule was hampered by the fact that corroborating documents, such as bank statements, are only available for the previous six years. This, they said, makes settling people’s affairs difficult for executors who do not always have the necessary documents available to them.

But nothing changed. And when you see the sort of revenue it brings in, you know why.

It is also very complex, but an aversion to leaving your loved ones with a tax bill when you die, should encourage you to take investment steps wisely during your lifetime.

You can find out more in our guide to passing on wealth.

Fidelity’s team of financial advisers can also guide you through. To find out more click here.

Utilising the various tax-efficient savings plans from ISAs to SIPPs is an obvious starting point and working out the best way to manage your estate and the distribution of your assets before and after your death should be discussed with a specialist in this area of taxation.

Do that and you can make sure that more of what’s yours goes into the pockets of your loved ones - and not the tax man’s.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.