Inheritance tax receipts have been on a one-way trajectory in recent years as rising asset values and frozen tax-free allowances leave families at the mercy of fiscal drag.
Families have paid £4.4 billion in inheritance tax so far this tax year (April-September) – £100 million more than the same period a year ago, equivalent to a 2.3% jump.
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Stephen Lowe, director at retirement specialist Just Group, said: “Inheritance tax continues to prove a treasure trove for the chancellor. Rising asset prices, frozen thresholds and a tightening of the exemption regime are all combining to drive ever-growing receipts.
“Anyone who is uncertain or concerned that their estate may be subject to inheritance tax should get an up-to-date valuation of their estate, including a recent assessment of their property wealth.
"Estate planning is complex and difficult – especially with tinkering to the rules – and many families who wish to manage their estate efficiently will benefit from professional financial advice.”
“The rise in receipts is not just a fiscal story, it’s a wake-up call,” said Ian Dyall, head of estate planning at wealth management firm Evelyn Partners. “Many households are sleepwalking into substantial tax bills.”
“Families should remember that estate planning is not just about tax efficiency, it’s also about ensuring that wealth is passed on in a way that meets the family’s objectives and avoids unnecessary financial stress for beneficiaries, while in some cases preserving business continuity,” Dyall said.
Frozen inheritance tax thresholds
Under current rules, you can pass on an estate worth up to £325,000 before an inheritance tax bill is due, with an additional £175,000 allowance for those leaving the family home to their children or grandchildren (although this is tapered once estates exceed £2 million). Married couples can combine their allowances.
These allowances are known as the regular and residential nil-rate bands.
The £325,000 allowance has been at this level since 2009, while the £175,000 residential nil-rate band was phased in between 2017 and 2020.
Since April 2020, when the residential nil-rate band was last increased, average UK house prices have increased by more than 27%, according to Land Registry data.
Meanwhile, the Bank of England’s inflation calculator suggests that assets valued at £325,000 in 2009 (when the regular nil-rate band was last increased) could be priced at more than £523,000 today.
This suggests the regular nil-rate band is worth around 62% of its original value.
“These freezes are a stealth tax, which allows the government to increase its take without backlash from a headline-grabbing tax hike, but it still contributes to the highest tax burden in 70 years,” said Nicholas Hyett, investment manager at Wealth Club, the investment service.
Will inheritance tax rise in the Autumn Budget?
Taxes are likely to rise in the Autumn Budget on 26 November, as analysts warn that Reeves’s £9.9 billion fiscal headroom may have morphed into a £20 billion shortfall.
Rumours have been swirling, with reports that Reeves could look at tightening inheritance tax rules. This could include introducing a cap on the total value of lifetime gifts, or changing the rules on taper relief.
Under current rules, you can give away as much wealth as you like during your lifetime without generating an inheritance tax bill, provided you outlive the transfer by seven years.
If you die before the seven years are up, but survive for more than three years after making the transfer, you qualify for a reduced rate of inheritance tax under taper relief rules.
“Shifting the seven-year rule to a ten-year rule is one option,” said Wealth Club’s Hyett. “Gifts made up to ten years before death could be taxed as if they were part of the estate – making one-off gifts to children to help with things like buying a new house potentially problematic, especially for those who die young, piling financial pain on top of personal grief.”
IHT relief on regular gifts out of surplus income is perhaps the most generous relief available at the moment, and is often used by grandparents to help with things like school or university fees.
“That could make it a source of extra tax,” said Hyett. “For example, if grandparents were gifting their children £20,000 a year to cover private school fees, as long as this was out of regular income it would currently be free of IHT. However, if that relief were cut then those gifts would fall under the seven year rule and result in £40,000 of additional inheritance tax.”
Questions around the future of inheritance tax could encourage people to consider giving gifts during their lifetime while they know where they stand, said Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown.
“However, it’s absolutely vital not to give money away that you can’t afford to part with,” she added. “As you get older, your spending needs are likely to change, and some people will need to pay for care, which can have a profound impact on their finances.”
Those who are in a position to make lifetime gifts can take advantage of the £3,000 annual gifting allowance. The seven year rule does not apply to these gifts – but note that the £3,000 limit is the annual total, not the allowance per gift.
“There’s a separate rule that means you can give away surplus income inheritance-tax free too,” Coles said. “You need to pay it from your regular monthly income and have to be able to afford the payments after meeting your usual living costs.”
How to cut your inheritance tax bill
As things stand there are still ways to reduce the inheritance tax paid by your loved ones, although many of them do require time and more risk. Those concerned about inheritance tax could consider:
1. Giving money away early – still an option as things stand
Gifts taken out of regular income, which are not deemed to affect the giver’s standard of living, are inheritance tax free on day one – as are certain smaller gifts. Timing is key as you can give unlimited amounts away but typically these take seven years to be completely inheritance tax free. Of course, once you give away the money you’ve lost control. If you need it back for an emergency, that’s not an option.
2. Investing in unlisted companies that qualify for Business Property Relief
These are typically inheritance tax free after two years. Investing in unquoted businesses can be risky, however, unlike giving the money away, you retain control. From 2026 you will have an overall £1 million Business Relief Allowance. Anything in addition will be taxed at half the normal rate or 20%.
3. Investing in an AIM ISA
ISAs are not inheritance tax free. When you pass away, your loved ones could miss out on 40% of your hard-earned cash. AIM ISAs are a popular, although riskier way, to reduce this. An AIM ISA portfolio simply means using the money you hold in a tax-efficient Individual Savings Account to invest in smaller AIM-listed companies. Currently AIM shares could be IHT free after two years. From 2026 the IHT will be halved to a rate of 20%.
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