In 2007, George Osborne announced the “death knell for death taxes” when he promised that only millionaires would pay inheritance tax.

But more than a decade after the former Chancellor’s pledge, this is far from true – and it could be about to get much worse under Labour’s plans to increase the tax in the forthcoming Budget.

According to the latest data from HM Revenue and Customs, over half of the estates faced with the dreaded charge are worth less than £1m.

The tax take from death duties has been steadily increasing over the past few years, since the tax-free nil-rate band of £325,000 has been frozen since 2009, and isn’t set to change until 2028.

Part of the problem is that Mr Osborne only half delivered on his promise. His introduction of the £175,000 residence nil-rate band (RNRB) in 2017 gave couples passing their home on to their children a combined allowance of £1m.

But there are many caveats to the RNRB, and £1m, in a world of soaring property prices, is hardly enough to save thousands of middle-class families from being caught in the net.

The bulk of inheritance tax revenue is paid for by estates worth more than £2m. However, the super wealthy face a far lower tax hit than the country’s middle classes.

The chart below shows that Britain’s wealthiest pay lower rates of inheritance tax than families inheriting much smaller estates.

The IHT rate is set at 40pc. But this is the charge due on values above inheritance tax-free allowances such as the nil-rate band.

The rate families actually pay is much lower, when looking at the tax charged on the estate as a whole. According to analysis carried out by the Office of Tax Simplification in 2018, the average rate paid by families is 20pc.

For large estates, this drops significantly – to just 10pc for those with estates of £10m or more.

This is because when it comes to avoiding inheritance tax, the ultra-wealthy have far more tax reliefs at their disposal.

Higher-value estates are more likely to include unlisted stocks and shares on the Alternative Investment Market (AIM), farms and family businesses, which may qualify for relief from inheritance tax.

Lower-value estates, on the other hand, are mostly made up of cash and property.

Chancellor Rachel Reeves has several options available to her when it comes to raising more money from inheritance tax – including increasing the headline rate, reducing the tax-free allowance and altering exemptions and reliefs. Some could affect the tactics often used by the super-rich, but the middle classes will still get caught in the tax net.

Sean McCann, of insurance firm NFU Mutual, said: “If the bulk of your wealth is tied up in a valuable home, your planning options are more limited as you’re less able to make gifts during your lifetime.

“The significant rise in property values means that a tax that was designed to catch the wealthy is now affecting more middle-income families.”

Many of those with more modest estates also cannot afford to take a risk with their money by investing in AIM shares that qualify for Business Property Relief, a strategy more commonly used by wealthier taxpayers.

Andy Butcher, of the financial advice firm Raymond James, said: “It could well be that of the £10m estate, £8m is exempt, making the effective rate of inheritance tax much lower than the individual with a portfolio of non-exempt buy-to-let properties.”

Inheritance tax was once famously described by former Labour chancellor Roy Jenkins as a “voluntary levy” – owing to the fact that, with careful planning, paying the hated 40pc levy can often be avoided using the exemptions detailed below.

But Laura Suter, of stockbroker AJ Bell, said avoiding inheritance tax is easier for the wealthiest, who can enlist the services of a financial adviser.

“Wealthier individuals are more likely to be able to afford professional help with their tax affairs, meaning they can make better use of gifting rules and allowances to reduce the inheritance tax liability on their estate,” she said.

That said, many of these allowances are also open to those with smaller estates, who can use them to shield their legacies from the taxman.

As the rules currently stand, every year, you can give away up to £3,000 in total spread across as many people you like, tax-free. If you make gifts above this threshold, then you will usually need to survive them by seven years before they become free from inheritance tax.

In the tax year 2020-21, 13,380 “Partially Exempt Transfers” (PETs), which allow individuals to make unlimited gifts free of inheritance tax, failed, resulting in inheritance tax bills of up to £1.4m.

One of the most tax-efficient ways to give wealth during your lifetime is through the “surplus income” rule, which effectively allows for unlimited gifting. Only 430 people made use of the unlimited gifting rule in 2021-22 – yet they saved collectively £67m from death duties.

Inevitably, the wealthier you are, the easier it is to syphon off portions of your income without having to worry about running out of money.

But as long as your payments are regular, sourced from income and do not lower your standards of living, then these gifts will be taken out of your estate for inheritance tax purposes.

If your main asset is your property, then you may want to consider gifting this to your children so it is outside of your estate by the time you pass away. However, you must not continue living in the property after you have gifted it – and you will have to survive the gift by seven years in order for it to be discounted.

If you owned your home after July 7, 2015 and sold it in order to downsize or move into a care home, your executors might be able to claim downsizing relief. This is normally the same value as the RNRB.

However, the relief is lower for estates worth more than £2m – then the RNRB is reduced by £1 for every £2 above the taper threshold.

Pensions are also free from inheritance tax – though this could change in the upcoming Budget, too.

Under the current rules, the person you choose to inherit your pension will pay income tax at their marginal rate if you die after 75. So this is much more tax-efficient if your beneficiary is a basic-rate taxpayer or even a non-taxpayer, as opposed to a higher-rate taxpayer.