ereaved families handed a record £7.5billion in inheritance tax to the Treasury last year, new official figures show.

That is a jump from £7.1billion in the previous tax year, and notches up the third record annual haul in a row.

The property price boom over recent decades combined with frozen thresholds is dragging more families into the inheritance tax net, and the Government is raking in ever bigger sums as a result.

The Office for Budget Responsibility forecast last month that inheritance tax receipts will reach £9.7 billion a year in 2028/29.

Despite rumours the Government planned to ease the burden of the controversial tax, it failed to announce changes in the Autumn Statement or Spring Budget, and proposals are now expected to be revealed in its election manifesto.

Only the richest 4 per cent of families pay inheritance tax, which is 40 per cent on any assets over the threshold of £325,000, or £500,000 if you are leaving a property to your direct descendants.

However, those who do pay the tax can be hit for tens or hundreds of thousands of pounds. 

The standard nil rate band for inheritance tax is £325,000 but couples who are homeowners can leave an extra £175,000 each of property wealth from their main residence to children and grandchildren. This creates a maximum total IHT-free amount of £1million for a married couple with direct descendents.

The Institute for Fiscal Studies recently estimated that the number of estates liable for inheritance tax will rise to more than 7 per cent by 2032-33. Last week, the IFS called for an inheritance tax raid on unspent pension pots and other loopholes, with the funds used to lower the overall tax rate.

If the Government decides to reduce inheritance tax, its main options are cutting the headline rate, raising or reforming thresholds, and changing gifting rules.

 How much is inheritance tax and who pays?

You need to be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, for your loved ones to have to stump up death duties.

This threshold is known as the 'nil rate band'.

But there is a further chunky allowance which increases the threshold to a joint £1million if you have a partner, own a property, and intend to leave money to your direct descendants.

This is called the 'residence nil rate band'.

Once an estate reaches £2million this own home allowance starts being removed by £1 for every £2 above this threshold. It vanishes completely by £2.3million.

If you are worth more than this, your beneficiaries will have to hand over 40 per cent of your assets above those levels to the Government.

How might the Government reform inheritance tax? 

1. Raise the threshold: The £325,000 nil rate band has been frozen for many years and the extra £175,000 per person headroom for those leaving property to direct descendants was introduced by former Tory Chancellor George Osborne.

One option could be to get rid of the complicated property rules and simply raise the nil rate band to £500,000, or £1million for married couples, for everyone.

2. Cut the 40% rate: A reduction in the headline rate or a new tiered system or sliding scale might be under consideration.

3. Abolish it outright: This is likely to be unaffordable, and given tight finances seen as too big a handout to wealthier families, but the Tories might promise to move towards this target in the longer term.

4. Change gifting rules: These are complicated as they stand and the annual £3,000 tax free allowance hasn’t changed since 1981. Inflation has been 270 per cent since then. The Government's independent tax gurus suggested reforming complicated inheritance tax gifting rules four years ago but no action was taken.

Get your estate valued if you might be liable

Those who may be liable for inheritance tax should look into tax planning as soon as possible, if they want to avoid their loved ones paying it. 

'The prospect of a general election looms large with one expected to be held in the second half of the year and it is likely that tax cuts and the economy will feature prominently in the coming months,' say Stephen Lowe, a director at Just Group.

We are already seeing public discussion about whether certain tax reliefs should be scrapped to make the ways wealth can be passed down between generations fairer, and we expect this to continue as we get closer to the election.

'Even without any changes to IHT, the OBR predicts the tax will continue to raise even more for the Chancellor of the Exchequer, and we encourage people to check if they may get caught by the tax.

'A good way to start is to assess the entire value of their estate, including an up-to-date valuation of their property.

'Professional, regulated advice can help people work out the total value of their estate, calculate how much tax they may be likely to owe and understand what options they have to manage their potential tax liability.'

A rising number of middle income families now face hefty tax bills

'Despite considerable speculation that the government would look to enact inheritance tax reform during the last year, so far all has remained quiet on this front and this morning’s figures illustrate exactly why the Chancellor would have been keen to leave it well alone,' says Rachael Griffin, tax and financial planning expert at Quilter.

'This significant increase has reignited discussions about the fairness and structure of the IHT system, particularly given an increasing number of middle income families now face hefty tax bills thanks to the government’s extended IHT threshold freeze.

'The lowering of the headline rate of inheritance tax from 40 per cent would undoubtedly be met with approval from core Tory voters. However, more widely, it would likely prove unpopular given it would benefit the rich at a time when so many across the nation continue to struggle with the cost of living.

'The Residence Nil Rate Band, while well-intentioned, is marked by its complexity and often excludes a significant demographic, particularly the rising number of childless elderly.

'A more equitable and simplified inheritance tax system involving raising the nil rate band to £500,000 would not only be fairer but more reflective of the changing demographics and societal structures of this country.'

Current rules penalise childless and unmarried people

'This month marks 15 years since the inheritance tax nil rate band was last increased,' says Alastair Black, head of savings policy at Abrdn.

'This freeze, combined with rising asset values, means that the tax is affecting more and more people than it was ever intended to capture.

'As addressing the tax’s scope, we should also take the opportunity to simplify it. One way to achieve this would be to remove the residence nil rate band and increase the standard nil rate band.

'This would create a more streamlined regime, and encourage more people to engage with estate planning – helping wealth move more freely between the generations, which in turn could bring significant benefits to the economy and those under financial pressure amid the ongoing cost of living crisis.

'It would also no longer penalise those without children, and who aren’t married or in a civil partnership, creating a more equal tax system.'

Struggling children and grandchildren will foot the inheritance tax bill

'This record inheritance tax haul for the Treasury is hardly surprising given the quite purposeful freezing of the tax-free allowance since as far back as 2009', says Laura Hayward, tax partner at Evelyn Partners.

'The average UK house price alone has increased by approximately 82.7 per cent since then.

'With no end to the freeze in nil-rate bands in sight there will be an escalation in inheritance tax liabilities, if rules remain the same - not least because there is a massive transfer of wealth in the offing in the next couple of decades.

'Research shows that the older generations have as much as £2.6trillion of equity tied up in their homes, which the next generation or the one after are set to inherit.

'It isn’t the so-called boomer generation, wealthy or otherwise, who will foot the inheritance tax bill on their estates – it’s their potentially struggling children and grandchildren who could be parted from a big chunk of the hard-earned family savings.

'Any future government tempted to fill gaps in the public finances by increasing the inheritance tax burden further will have to reckon with the deep-seated aversion that most households have towards the imposition of death duties.'