Families pay £1.2bn in unnecessary inheritance tax as Covid toll rises

Families facing huge inheritance taxes could cut their collective death duty bills by more than £1bn, analysis of official figures suggests.

It comes as thousands more people – a fifth more than normal – are expected to pay the 40pc levy this year, after the pandemic caused excess deaths to surge, with confirmed virus deaths surpassing the 100,000 mark this week.

The startling death rate is already having an effect. More than £550m was paid in death taxes in October alone, when monthly receipts hit their highest point for five years, around £100m higher than the same time in 2019.

But almost half of the money tied up in inheritance tax- paying estates worth £1m or more is invested in assets such as shares or held in cash, totalling £1.2bn, according to the latest data from HM Revenue & Customs.

This is money that could be funnelled into legitimate tax- saving schemes or gifted away tax- free, according to Weatherbys Private Bank.

Married couples can pass on up to £1m tax free, but many with personal wealth above this amount are voluntarily paying over the odds by failing to make the most of their “liquid wealth” and the tax breaks on offer, said the bank. Estates worth more than £ 1m pay three- quarters of all death duties, which total more than £5bn a year.

Julia Rosenbloom, of tax firm Smith & Williamson, said the bills would only get bigger as house prices and stock markets continued to go up. She said families should limit how much they pay by using legitimate reliefs.

These include the annual tax- free gifting allowance of £ 3,000 and the unlimited £250 small gifts allowance.

Bigger gifts above the allowance will become tax free if survived for at least seven years. Gifts “out of income” can be hard to prove but are limitless.

Insurance policies can be passed into trust, which means they fall outside the estate for tax purposes, and unused pension savings can also be passed on tax free.

Giving to charity or putting money into loan trust arrangements are also ways to pay less.