The amount of money government generated from inheritance tax bills fell for the first time in a decade last year.

Death taxes generated £5.2bn for the public finances in 2019/20, which was a drop of 4 per cent or £223m on the £5.4bn taken in 2018/19.

The reduction follows reforms to the main residence nil-rate band in 2017/18 which have freed thousands of families from paying the tax.

However, as the government grapples with the economic fallout from the Covid crisis, experts have speculated that future increases could prove tempting for chancellor Rishi Sunak.

The government introduced the main residence nil-rate band in 2017/18, meaning that someone could pass on an extra £100,000 from the value of their main home to their direct descendants without paying IHT, on top of the £325,000 nil-rate band for all assets.

The main residence nil-rate band has increased each year since then by £25,000 until the current tax year 2020/2021 when it reached £175,000.

The reforms were part of a pledge by former chancellor George Osborne that by 2021 a couple would be able to pass on a combined total of £1m without their beneficiaries having to pay IHT.

As a result, during 2017/18, which was the first year of the main residence nil-rate band, 24,200 estates paid IHT – down 14 per cent from 28,100 in the year before the reforms.

This is the first fall in the percentage paying IHT since 2009-10, when the nil rate band was frozen.

Meanwhile 20,200 estates used the main residence nil-rate band 2017/18, with £3.1bn of assets sheltered from IHT that would otherwise have been due.

AJ Bell senior analyst Tom Selby says: “After a decade of rising IHT bills, the amount people paid in tax on death dropped £223m last year. 

“The primary reason for the recent decrease in both the proportion of people hit by IHT and the overall tax bill was the introduction of the main residence nil-rate band in 2017/18.

“This meant that, in addition to the main £325,000 per person IHT-free allowance, people could pass on their primary home to a ‘direct descendant’ without paying tax on the first £100,000.

“This main residence nil-rate band has increased by £25,000 each year since 2017/18, reaching £175,000 at the start of the current tax year. 

“It is due to rise in line with Consumer Prices Index inflation from 2021/22 onwards.

“The aim of the policy, announced with huge fanfare by former Chancellor George Osborne, was to allow family homes worth up to £1m to be inherited tax-free. 

“This can be achieved by a couple combining their IHT allowances.

“However, given the parlous state of the nation’s finances, it would be no surprise to see Osborne’s big IHT giveaway come under the microscope as his successor, Rishi Sunak, seeks ways to raise much-needed cash to pay for the nation’s eye watering Covid-19 debts.”

Hargreaves Lansdown personal finance analyst Sarah Coles says: “The residence nil rate band has freed 20,200 people from the inheritance tax trap – but it hasn’t stopped the taxman taking a £5.2bn bite from our wealth in the last tax year.

“The residence nil rate band has very little impact on the amount of IHT paid overall, because so much of the tax is collected from larger estates – for whom £100,000 is small potatoes. 

“These large estates also start to lose this relief as soon as their estate is over £2m, so the very biggest taxpayers don’t get the relief at all.

“But you don’t have to be enormously wealthy for your family to pay over the odds after you’ve gone. 

“There are steps we should all be taking to take advantage of the reliefs while we can, to protect our loved ones from a needless tax bill later.”