Taxpayers face extra £3,400 bill due to rule from 1981 | Personal Finance | Finance

HMRC has quietly increased tax bills over the years, with people paying thousands more as a result. This relates to a hugely unpopular tax that will be expanded from next year.

Major changes are coming up soon for inheritance tax. The 40 percent tax is being expanded from April 2027 to include pensions in its remit. Martin Lewis recently spoke about this change on his BBC podcast.

You can avoid the tax as long as the value of your estate is within certain allowances. However, some of these allowances have remained fixed for many years, dragging more people into paying the tax as house prices and other asset prices have gone up.

Hannah Martin, pensions expert and founder of Rich Retiree, said there is a case for increasing the allowances as inflation drives up prices. She explained: “The nil-rate band has been fixed at £325,000 since 2009, and will remain frozen until at least 2030.”

Each person can pass on up to £325,000 in total assets tax-free, with an additional £175,000 that can apply to your home if you are passing it on to a direct descendant, such as a child or grandchild. You can pass on any unused allowances to your spouse or civil partner when you die.

The £325,000 allowance would be more than £525,000 had it gone up with inflation, which would save families hit by the 40 percent tax more than £80,000.

However, another aspect of the tax has been fixed in place for much longer. Ms Martin said: “The £3,000 annual inheritance tax exemption on gifts has been in place since 1981.”

One way to reduce your inheritance tax liability is by giving away amounts. You can gift up to £3,000 each tax year, divided between any number of people, tax-free. You can also give away as many gifts up to £250 to different people, as long as you don’t use your other gifting allowances on those same people.

Legislation was introduced in 1981 to increase the gifting allowance from £2,000 to £3,000, back when Margaret Thatcher was Prime Minister, with Geoffrey Howe as Chancellor. If this had gone up with inflation, the allowance would now be worth more than £11,600.

This means you could give away an extra £8,600 in gifts each year, saving your estate £3,440 in inheritance tax liability. Ms Martin said the inheritance tax system could be improved by simplifying the allowances.

She said: “Some suggestions include simplifying the multiple allowances system we currently have, which includes a nil-rate band, residence nil-rate band, spouse exemption and gifting exemptions, and instead replace them with a single, larger tax-free allowance per person.

“This would simplify the administration of taxing, make it easier for people to understand, and remove early gifting to avoid the seven-year rule.” Beyond your annual gifting allowances, you can give away any amount tax-free as long as you survive seven years after giving the gift.