More recent IHT data shows the surge in payments of the tax is gathering pace. Earlier this year, HMRC revealed that the IHT take for 2023/24 had risen 5.6 per cent on the previous year to a record £7.5 billion ($9.6 billion).

Wealth Club, a UK investment service for high net worth and sophisticated clients, believes that these trends are likely to continue with the average IHT bill reaching £248,000 in the current tax year (2024/25), spread across 30,300 estates, up 15.3 per cent and 6.5 per cent respectively.

Inheritance tax is charged at 40 per cent above a threshold on the estate of a deceased person, currently set at £325,000. About 4 per cent of families must pay it, as most estates have fallen under the nil rate band, as the threshold is called. If the deceased was married or in a civil partnership, assets they leave to a spouse or civil partner are not subject to IHT, regardless of the value of the deceased's estate.

There are also fears that Reeves will go further on the inheritance tax side in the October budget, such as making it more difficult to gift money and assets, like farmland, tax free. Currently, no inheritance tax is due on gifts if they are made by a person who lives for more than seven years after the gifts were made. Individuals can also claim up to 100 per cent relief on the inheritance of agricultural land if it is being actively farmed. Another possibility that has been cited by analysts would be to scrap business relief, which enables an individual to pass on a company or shares if it is unlisted with 100 per cent tax relief. The alarm was also sounded for a hike in the capital gains tax.

“Rising property prices and savings built up over the pandemic, together with frozen inheritance tax thresholds, continues to drive increases in the number of people paying inheritance tax,” Nicholas Hyett, investment manager at Wealth Club, said in a note.

“It’s tempting to see inheritance tax as a problem restricted to the mega wealthy, since only around 1 in 24 deaths result in an inheritance tax charge. However, not only is the number of people facing this most hated of taxes growing all the time, but that number is probably misleadingly low,” he added. “Since spouses can pass assets between each other without creating an inheritance tax liability, the number of couples generating a liability on the death of the second partner is probably significantly higher. The result is that more like one in 14 families will ultimately face an inheritance tax bill,” he continued.

“IHT is one of the few large taxes the government hasn’t explicitly promised not to change. That’s made it something of a political hot potato, and led to suggestions it could be a candidate for a hike,” Hyett said. “The reality though is that the government doesn’t need to change anything to increase its IHT harvest, it can just let frozen tax bands do their work. That will result in ever more families being dragged into the IHT net, and those that already pay see their tax bills rise. All without a spending a penny of political capital. Stealth taxes strike again.” 

Crackdown?
Laura Hayward, tax partner at professional services and wealth management firm Evelyn Partners suggested that a budget IHT crackdown would certainly ruffle some feathers, as many savers believe that as they have paid tax in some way on their wealth already, taxing some of those assets again at 40 per cent as they are handed over at death is hard to justify.

“Looking at the detail of the statistics, the extent of business and agricultural property reliefs might give fuel to the fire of calls to water these down. As usual, by far the most used relief was the exemption between spouses and civil partners, which sheltered £15.5 billion of assets from tax. But the second most valuable relief was business property relief (BPR), even though the assets it protected fell 11 per cent on the year to £2.9 billion,” Hayward added.

“Both reliefs have featured prominently in Labour soundings that some IHT reliefs are too generous and being abused. Criticism of business relief often focuses on the inclusion of AIM shares, which many consider an anomaly. But that should not deflect attention away from the important role that these reliefs play for many businesses,” she added.

“The aim of BPR was to ensure that family-owned businesses could continue to trade after a death. If these reliefs were abolished or significantly restricted, the application of a top rate of 40 per cent inheritance tax would in many cases mean the business had to be sold on the death of the current owner to pay the tax bill. This would have significant implications for the employees and the stability of the business,” Hayward said.

“Very wealthy individuals may have other assets from which to pay inheritance tax, so this would be a particular burden to those whose farm or business is their main asset and livelihood. The current legislation has been regarded as demonstrating sound commercial sense in allowing businesses to continue without the looming risk of a forced sale on death. Farming businesses would often become unviable if a substantial proportion has to be sold,” she added.

“These reliefs have previously attracted criticism, with the implication being that wealthy individuals may invest in farmland or small businesses purely to shield their wealth from inheritance tax. However, a report commissioned by HMRC in 2017 noted views of taxpayers and advisors that inheritance tax planning was primarily driven by a desire to keep businesses and farms intact on the death of the owner. A reduction in inheritance tax liabilities was found to be a secondary concern,” Hayward said.