The stealth inheritance tax robber is creeping closer to homes across Britain

Thousands of families in the Midlands and Northern England are being forced to pay inheritance tax for the first time.

Official figures from The Mail on Sunday show the extent to which the government's secret tax grab is ensnaring more families for whom the tax was never intended.

For decades, wealthy families in London and southern England have been the biggest payers of inheritance tax on their family wealth following the death of a loved one. Yet the inheritance tax was only intended to hit the wealthiest households.

Now rising house and asset prices – combined with the prolonged freeze on tax exemptions – mean more and more middle-class households will have to pay this.

Four percent of all estates are now subject to inheritance tax. There are areas in Britain where the number of inheritance tax breaching estates is soaring for the first time, we can reveal.

> 10 ways to avoid inheritance tax (legally).

The number of tax-paying estates in the North East of England increased by 27 per cent between the 2019-20 and 2020-21 financial years, according to the latest government data.

A Freedom of Information request filed by wealth manager Quilter and seen by this newspaper shows that the West Midlands recorded the second largest percentage growth in England, with 24 percent more families paying inheritance tax than in the previous year.

In Yorkshire and the Humber, a further 18 per cent of estates were subject to inheritance tax. However, the average bill paid by households in the area has fallen by £28,000 – an indication that families with smaller estates are increasingly falling under the tax burden, reducing the average bill.

The value of the average estate paying inheritance tax in the region fell by £70,000 compared to the previous year, to £1.27 million, suggesting more families have just crossed the threshold.

In the East Midlands, average inheritance tax fell by £52,000, while the number of estates affected rose by 13 per cent. The average size of estates paying the tax fell by £130,000 in a year to £1.17 million.

The increase is not limited to England either. In Northern Ireland, the number of tax-paying estates rose by almost a third in one year – the highest increase in any of the 12 UK regions and countries. In Wales this figure was 13 percent and in Scotland 8 percent.

Quilter's Shaun Moore warns that a key factor in the insidious change is that a greater number of less wealthy families are being stung for the first time.

Half a million to pay inheritance taxes

The tax became a concern this summer after internal HM Revenue & Customs forecasts revealed that a further 49,400 grieving families would be dragged into paying inheritance tax this year. The tax agency was forced to revise its previous estimates, quadrupling them from 13,400, a change he blamed on high inflation.

Chancellor Jeremy Hunt has faced increasing pressure to scrap the death penalty. In his autumn statement last month, he was widely expected to halve the inheritance tax rate, but he disappointed Conservative MPs by leaving the tax unchanged.

Many households would not have paid taxes if the thresholds had risen in line with inflation.

The main threshold – the so-called zero interest band that allows you to pass on the first £325,000 of your estate (property, shares and cash) tax-free – has been frozen since 2009 and will remain so until at least 2028. the government said. Anything above that is typically taxed at 40 percent.

Couples who are married or in a civil partnership can combine their benefits so that on the death of the second partner, £650,000 of the estate is tax-free.

Those who leave a family home for direct descendants – children or grandchildren – can effectively increase their tax-free wealth up to a total threshold of £500,000 (or £1 million for a married couple).

This is because there is a second charge of up to £175,000 (or £350,000 for a couple) specifically for properties passed in this way, known as the residential nil rate band. However, on larger estates this is reduced by £1 for every £2 the estate is worth more than the £2 million.

Despite the concessions, a growing number of estates are breaching the zero interest rate threshold due to increases in property prices.

If the £325,000 figure had followed inflation since 2009, when it was last increased, it would be worth £506,000 today, according to Quilter.

The average price of a house in Britain has almost doubled since then, from £165,314 in September 2009 to £291,385 in September this year, Land Registry figures show.

Moore says: 'Inheritance tax was once seen as a tax on wealthier individuals, but the reality is that the average UK property is less than £50,000 below the standard nil rate.

'Now that the zero interest rate band and zero interest rate band for homes have been frozen until 2028 and house prices are still high, many more people could be unexpectedly faced with paying an inheritance tax bill.'

In August, The Mail on Sunday warned that more than half a million families would have to pay inheritance tax over the next decade.

The Office for Budget Responsibility estimates that the government will earn £8.4 billion a year from inheritance tax in 2027-28, up from the £5.76 billion earned in 2020-21.

Families will pay £24,000 more in inheritance tax

A further 4,000 estates took the total subject to inheritance tax to 27,000 across Britain for the 2020-2021 tax year. The amount paid increased by £24,000 on average, according to an analysis by Quilter of Revenue Data.

In England, families paid £28,000 more than the previous year as rising house prices combined with the frozen threshold forced many to hand over their homes more than ever.

The biggest growth was in capital, where the average inheritance tax-paying estate netted an extra £100,000, according to Quilter.

This is largely due to rising house prices in London, where the average home increased in value from £496,000 in December 2020 to £537,000 in September this year.

Moore says: 'With taxable estates in London now averaging £1.73 million, largely driven by property values, it is clear that more and more families are having to pay inheritance tax.'

Real estate accounted for a third of the value of the average property in Britain. Securities and cash, including money held in government bonds, premium bonds, shares and bank accounts, made up 46 percent of assets. According to the tax authorities, other items, such as furniture, jewelry and art, made up the remainder.

In London, real estate represented 42 percent of estates. This was followed by the south east and east of England, where it represented 38 percent.

Investments and cash made up the largest proportion of estates in Scotland at 58 per cent, followed by the north-east of England and Wales, where it made up 56 per cent.

How Christmas gifts can reduce your tax bill

This can be a good time of year to make significant gifts to family, which will not only reduce the size of your estate but also give a boost to the younger generations.

You can donate a maximum of €3,000 per year without having to pay tax. This can go to one person or be divided among several people. If you did not use this allowance last year, you can still use it by donating €6,000 this tax year.

You can also give €250 to as many people as you want, as long as you have not used another amount for the same person. However, these rights have been frozen for around forty years, which Moore describes as 'ridiculous'. He says: 'If they had risen with inflation they would be worth over £10,000 and around £1,000 respectively.'

You can donate larger amounts and assets to friends or family to potentially reduce your inheritance bill: from furniture and jewelry to antiques and cash.

However, the donation is only tax-free if it was given to them more than seven years before your death.

It's critical that you keep track of what you give, to whom, when it was transferred, and its value. Otherwise, the onus is on your family to prove that the gift was made more than seven years ago.

If the gift is subject to inheritance tax, it is the recipient who has to pay and he or she may not be able to afford a surprise tax bill because they may have spent the money, warns Ian Dyall, head of wealth planning at asset manager Evelyn Partners. .

He says a lesser-known trick for passing on your wealth is to make regular payments from your income to someone of your choice.

This can be a very useful exemption that allows you to make unlimited, regular donations, free of inheritance tax, as long as it does not affect your normal standard of living.

These regular payments must consist of income, such as from work, rent, a defined benefit pension, or dividends on investments. It can't be paid from the capital you earn, which is where you sell investments.

Dyall adds: 'Even modest lifetime gifts can be useful as a way to save executors and beneficiaries the hassle and expense of dealing with inheritance tax before probate.'

When someone gets married, this can be another opportunity to hand money over to the younger generations.

You can give your child up to £5,000 if they get married or enter into a civil partnership, £2,500 to a grandchild or great-grandchild and £1,000 to someone else.

You can combine this with another exemption (but not the small donation exemption), which may allow you to transfer a larger amount in total.

Gifts between spouses or civil partners resident in Britain, and donations to charities and political parties are also exempt from inheritance tax.

Dyall says: 'The good news is that, if done correctly, lifetime wealth transfers can be beneficial in three ways: they can give the recipient a much-needed financial boost, they give the giver the satisfaction and pleasure of giving the gift, and they can also reduce the inheritance tax due on an estate if the donor dies.'