Accountants warn families of rising inheritance tax bills

A leading accountancy firm has warned families that rising property values and frozen tax thresholds could leave more estates facing an inheritance tax (IHT) bill.

Prime Accountants has highlighted that HMRC collected a record £936 million in IHT receipts in September, an increase of £265 million compared with the same month last year.

This is the second time this year that HMRC has recorded its highest monthly IHT receipts, following a previous record of £871 million collected in June.

While families may assume that IHT only affects the wealthiest members of society, rising asset values mean more estates could now be caught in the tax net.

One of the main reasons behind the increase in IHT receipts is a process known as 'fiscal drag'.

Although the rate of IHT remains at 40 per cent, the tax thresholds have not increased in line with inflation.

The standard nil-rate band of £325,000 and the residence nil-rate band of £175,000 are both frozen until 2031.

As the value of property, investments and other assets continues to rise, more estates could exceed these thresholds and become liable for IHT.

For example, an estate valued at £300,000 a few decades ago could now be worth more than £500,000, with property price increases and investment growth potentially creating an IHT liability.

Changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) could also mean fewer estates benefit from full tax relief.

A new £2.5 million threshold means that qualifying agricultural and business assets above this amount could be subject to an effective IHT rate of 20 per cent.

With tax thresholds remaining frozen and asset values continuing to increase, IHT receipts are likely to remain on an upward trajectory.

Further changes are also expected from 6 April 2027, when unspent pension funds and death benefits will be included in the value of a taxable estate.

Although unspent pension funds can be passed to a spouse without triggering IHT on the first death, any remaining funds could become subject to IHT following the second death.

For couples with a significant proportion of their pension savings left untouched, the changes could create a substantial additional tax liability for beneficiaries.

Andrew Cockman, (pictured) head of private client (tax) at Prime Accountants, said: “Many families underestimate the total value of their estate, assuming IHT will likely not affect them.

“Where old advice might have recommended preserving pensions and spending other assets to minimise IHT, we can suggest new strategies that factor in the addition of pensions to estates.”

Regularly reviewing estate plans can help individuals understand the value of their assets and whether their beneficiaries could face an unexpected tax bill.