HM Revenue & Customs collected £5bn in inheritance tax in January as inflation and higher property prices pushed up the value of estates.
According to data, published today (February 22), IHT receipts were £700mn higher than the same period a year earlier.
Annual house price growth continued on its upward trend last month, marking the strongest start to the year for 17 years after 2021 ended on double-digit growth.
Inflation is also up, reaching 5.5 per cent in January - its highest level since March 1992 as the cost of living continues to rise.
Shaun Moore, tax and financial planning expert at Quilter, said: “Sustained property price growth and asset price inflation has pushed up the value of estates, meaning higher IHT receipts for the government.”
He added that whilst IHT was once viewed as a tax on wealthier individuals, the reality is that the average UK property is only £50,288 short of the standard residence nil rate band.
Introduced back in 2017 as an additional amount that can be passed on tax-free against the value of the family home, the residence nil rate band is currently £175,000.
“With the nil rate band and residence nil rate band frozen until 2026 and house prices still on the up, many more people could face a hefty IHT bill,” said Moore.
“The residence nil rate band was introduced in 2017/18 to account for rampant house price growth, but as a result we have an incredibly complex IHT system.”
Moore cited the Office of Tax Simplification, which said in July 2019 that the residence nil rate band is one of the ‘most complex’ areas of IHT, so much so some solicitors choose not to advise this because it is too complicated.
“Perhaps now is time for a rethink of IHT to make the regime as easy to understand as possible for IHT payers,” said Moore.
“With sustained inflation, the nil rate band increased with inflation will eventually converge with the combined nil-rate band and residence nil-rate band."
Andrew Tully, technical director at Canada Life said higher volumes of wealth transfers during the pandemic also had a role to play.
Tully said: "No one likes to pay any more tax than they need too and yet with some simple steps you can arrange your financial affairs to be more tax efficient from an IHT perspective.
“These simple steps could include the order in which you access your assets during retirement, gifting, or putting money into trusts. As IHT is a largely discretionary tax, putting your financial affairs in order will ensure your beneficiaries receive your assets in the most tax efficient way possible.
“Seeking regulated financial advice is a critical first step on that journey.”