A simple solution that could save thousands of middle-class families inheritance tax

Many say the introduction of the nil-rated residential band has increased confusion for taxpayers.

Shaun Moore, of investment firm Quilter, said: “Although it was introduced with the aim of making more estates exempt from inheritance tax, in practice its use has often been unsuccessful due to complexity.”

The Office for Tax Simplification once described this as the most complex aspect of the inheritance tax system.

Introducing a £1m top-up would be easier on taxpayers – but now new research confirms it would also drastically reduce the number of middle-class families being dragged into the net. Quilter calculates that in one year alone the £1 million allowance would save 17,746 families from inheritance tax.

This is based on data from 2019-2020 — the latest year for which HMRC has full data on inheritance tax due to the delay between the date of death and the payment of inheritance tax bills.

In 2019-2020, 23,000 properties were taxed, of which 2,430 were valued at £2m or more.

A further 7,060 properties were valued between £1m and £2m. For these estates, exemption under the new rule would depend on their marital status – with couples benefiting from a joint allowance of £2m. Assuming 60 per cent of the deceased were married or in a civil partnership, 4,236 estates would have had a £2m allowance. The remaining 2,824 would have a £1 million allowance and would still have to pay inheritance tax based on the value of their assets.

Meanwhile, 13,510 rateable estates valued at less than £1m would be exempt from death charges regardless of their marital status.

The analysis showed that under the new rule, the Exchequer would make £3.16 billion net – less than half the revenue generated last year.