Inheritance tax: Britons losing £600MILLION to tax after missing out on death duty reliefs

People in Britain have paid an extra £600million in death duties after missing out on tax reliefs.

Inheritance tax (IHT) continues to rise annually with the Government collecting £6.1billion in death duties in 2021 – up 14 per cent on the year before.

Middle-class families are being hit by the 40 per cent tax as property prices drive their estates above the £325,000 tax-free allowance.

Figures published by HM Revenue & Customs reveal that families are not benefitting as much as expected from various reliefs to shield more of their estate from the 40 per cent charge.

Data shows that IHT reliefs saved bereaved families billions of pounds in 2019-20 the latest year which figures exists but these savings fell short of the taxman’s estimates.

Of the tax breaks analysed, the Government collected £4.4billion after expecting just over £5billion.

According to the figures, the biggest break – which allows spouses to transfer assets between one another tax-free – saved families £500million less than HMRC expected.

Chris Etherington of the tax firm RSM says the difference between the estimates and the savings shows that taxpayers do not understand the rules on family home allowance.

He told the Telegraph: “The rules relating to the residence nil-rate band are overly complex and it is widely viewed in the legal and accountancy sector that they need to be simplified for taxpayers."

The allowance is worth £175,000 to homeowners who pass their main property onto a direct descendant.

Etherington says one factor which is particularly complicated is when the relief is available after somebody has downsized or moved into a care home.

Another reason why taxpayers may be missing out on IHT relief is because they haven’t revisited their wills since the introduction of the allowance in 2017.

The tax expert added: “Many individuals will have set up their wills so that their assets are transferred to a discretionary trust and in order to qualify for the relief it needs to be inherited by children or direct descendants."

“In addition, married couples will often leave their assets to their surviving spouse. There is usually no inheritance tax due on such transfers and it can result in the unused residence nil-rate band being transferred to the surviving spouse.

“This means it could potentially be used on their later death and therefore defers the cost to the Exchequer and defers claims.”